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THE  MECHANISM  OF 
COMMERCIAL  CREDIT 


THE    MECHANISM    OF 
COMMERCIAL   CREDIT 

TERMS  OF  SALE  AND  TRADE 
ACCEPTANCES 


v/ 


BY 

W.  H.  STEINER,  Ph.D. 

ACTING     CHIEF,      DIVISION     OF      ANALYSIS 
AND   RESEARCH,    FEDERAL   RESERVE    BOARD 


D.  APPLETON  AND  COMPANY 


NEW  YORK 


1922 


LONDON 


COPTHIGHT,    1922,  BY 

D.  APPLETON  AND  COMPANY 


PRINTED  IK   THE   TrNITED  STATES  OP  AMERICA 


TO 
M.  F.  D. 


PREFACE 

^     This  book  is  addressed  to  the  business  man,  the  credit 
,*^  man,  the  banker,  and  the  student. 

V      Men  in  all  lines  of  business  are  daily  called  upon  to  de- 
cide whether  they  will  pay  cash  for  their  purchases  or  in- 
stead will  buy  on  credit.     Conversely,  they  themselves  are 
called  upon  to  decide  what  terms  they  will  offer  to  those 
\^  who  buy  from  them.    These  fundamental  questions  are  all 
't>  too  frequently  decided  by  the  average  business  man  with- 
'\  out  sufficient  knowledge  of  the  factors  involved,  and  con- 
sequently without  regard,  in  many  instances,  to  the  most 
advantageous    and    effective    credit    arrangements.     The 
smaller  business  man  who  incidentally  handles  his  own 
credits  is  naturally  under  the  greatest  handicap,  but  for 
those  who  devote  their  entire  time  to  serving  as  credit  men 
J  in  larger  houses  knowledge  of  this  kind  is  no  less  important. 
In  fact,  their  study  of  the  subject  of  commercial  credit 
should  be  much  more  thorough. 

Bankers  constantly  require  a  knowledge  of  credit  prac- 
tices in  different  lines  of  business.  Furthermore,  in  grant- 
ing loans  they  must  continually  give  consideration  to  the 
factors  that  determine  these  credit  arrangements.  In  other 
words,  they  must  have  an  intimate  knowledge  of  the  mech- 
anism of  commercial  credit  and  the  manner  in  which  it 
operates.  Not  only  is  this  true  directly  for  their  daily 
tasks,  but  from  a  broader  point  of  view  such  knowledge  is 
no  less  necessary  in  order  to  enable  them  to  understand 
the  relation  of  the  bank  to  commercial  and  industrial  life. 
Students  of  business  are  paying  increasing  attention  to 
the  role  that  commercial  credit  plays  in  the  modern  busi- 

vii 


viii  PREFACE 

ness  structure,  and  a  growing  number  of  colleges  and 
schools  of  business  are  offering  courses  that,  whoUy  or  in 
part,  are  devoted  to  a  study  of  the  subject. 

The  reader  will  find  in  this  book  both  a  summary  of  credit 
practices  in  leading  industries  and  an  analysis  of  govern- 
ing principles.  "The  reason  why"  need  not  invariably  be 
difficult  to  understand,  and  it  is  a  necessary  complement 
to  description  of  practice.  Neither  aspect  can  be  neglected. 
Effort  has  been  made  throughout  to  illustrate  the  princi- 
ples by  reference  to  the  situation  in  typical  industries. 

Equally  important  with  this  analysis  of  the  factors  at 
work  in  the  present  commercial  credit  structure  is  an  an- 
swer to  the  questions:  How  satisfactory  is  the  present 
system?  Should  it  be  modified  or  supplemented,  and  if 
so,  how  ?  This  raises  the  entire  question  of  the  trade-accept- 
ance system  v.  the  cash-discount  system,  which  has  been 
in  the  forefront  of  discussion  for  the  past  five  years  or 
more.  Every  business  man,  banker,  and  student  must  form 
an  opinion  on  this  question.  Previous  discussion,  too,  has 
been  largely  partisan,  and  has  not  clearly  indicated  the 
underlying  principles.  In  the  present  work  effort  has  been 
to  deal  with  these  features  in  a  clear  and  concise  manner, 
and  to  indicate  as  definitely  as  possible  the  conclusions  to 
which  this  analysis  must  lead. 

In  preparing  the  book  the  writer  has  dra^n  upon  vari- 
ous sources  for  his  information.  The  discussion  of  terms 
in  leading  industries  in  Part  III  is  based  upon  studies 
made  by  him  for  the  Division  of  Analysis  and  Research  of 
the  Federal  Reserve  Board,  in  the  course  of  which  data 
were  obtained  from  a  large  number  of  business  houses  and 
trade  associations.  Each  section  relative  to  conditions  in 
a  particular  line  has  been  submitted  to  an  authority  in 
that  industry,  as  indicated  at  the  appropriate  places  in 
Part  III.  Acknowledgment  is  due  to  each  of  the  gentle- 
men there  mentioned.    The  writer  is  also  greatly  indebted 


PREFACE  ix 

to  Mr.  H.  W,  Strong,  secretary  of  the  Strong,  Carlisle  & 
Hammond  Company,  Cleveland ;  Mr.  Sidney  Y,  Ball,  presi- 
dent of  the  Norris,  Alister-Ball  Company,  Chicago;  and 
Mr.  Philip  Hamburger,  Jr.,  treasurer  of  Henry  Sonneborn 
&  Company,  Inc.,  Baltimore,  for  kindly  reading  Part  I, 
dealing  with  the  factors  governing  terms.  In  connection 
with  Part  II,  dealing  with  the  trade  acceptance,  he  is  in- 
debted to  Mr.  John  S.  Jenks,  Jr.,  of  Philadelphia,  and  Mr. 
W.  W.  Orr,  assistant  secretary  of  the  National  Association 
of  Credit  Men.  Their  suggestions,  while  reflecting  oppo- 
site views  of  the  question,  have  materially  improved  the 
work. 

The  writer  is  also  greatly  indebted  to  Dr.  H.  Parker 
"Willis,  Professor  of  Banking  in  Columbia  University;  Dr. 
Frederick  B.  Robinson,  Dean  of  the  School  of  Business  and 
Civic  Administration  of  the  College  of  the  City  of  New 
York;  and  Dr.  George  W.  Edwards,  Assistant  Professor  of 
Banking  in  Columbia  University,  who  have  read  the  entire 
manuscript  and  made  many  helpful  suggestions.  The  opin- 
ions expressed  in  the  work,  needless  to  say,  are  entirely 
personal,  and  have  no  official  significance. 

W.  H.  S. 


CONTENTS 

PAGB 

I.    Intropuctiok 3 

Meaning-  of  terms  of  sale 3 

Getting  working  capital 4 

The  commercial  credit  system 5 

Analysis  of  the  system 6 

Relation  to  banking 9 

Scope  and  purpose  of  the  work 10 

Sources  of  data  as  to  terms     .......  11 

Previous  studies 12 

Divisions  of  the  work       . 13 

PART  I 

FACTORS  GOVERNING  TERMS 

II.    Length  of  Net  Terms 17 

The  fundamental  factor 17 

Nature  of  the  article 19 

"Pay-day"  terms 22 

Customary  settlement  dates 24 

Geography  of  terms 24 

Terms  on  manufacturers'  raw  materials     ...  25 

Tenns  on  fixed  capital  goods 26 

Carrying  the  purchaser 27 

Terms  in  retail  trade 29 

The  marketing  period  in  relation  to  the  bank     .  29 

The  marketing  system 30 

Some  illustrations 31 

The  wholesaler's  credit  function 34 

Manufacturers'  and  wholesalers'  terms       ...  35 

III.     Length  op  Net  Terms  (Continued) 38 

General  competitive  conditions 38 

Relative  size  of  buyer  and  seller 39 

Competition  or  concentration   among  buyers  and 

sellers 39 

Cash  outlay,  profits  margin  and  capital  position  of 

the  seller 42 

Trade-marked  goods 44 

Regularity  of  relationship  between  buyer  and  seller  45 
jsi 


xii  CONTENTS 

PAGB 

Business  character  of  each 47 

General  illustrations 47 

Mutual  inteiTelation  of  tenns 50 

TeiTiis  of  the  individual  house 52 

How  the  net  period  is  covered 53 

IV.    Datings 56 

Season  datings 56 

Advantages  to  the  seller 57 

Illustrations 59 

One-season  industries 60 

Frequency  of  purchases 62 

^                 Indirect  datings 63 

Shipments  to  distant  tei'ritories 64 

Competitive  or  extra  datings 65 

Datings  not  rigid 66 

Grouping  of  transactions 67 

V.    Cash  Discjounts 69 

Cash  discounts  and  trade  discounts       ....  69 

Nature  of  the  cash  discount 71 

Relation  to  terms 72 

Function 73 

Length  of  the  cash-discount  period 75 

Methods  of  quoting 76 

Size  of  the  discount 78 

The  credit  risk 79 

Position  of  the  seller 80 

Net  terms 81 

Low  discounts 82 

High  or  competitive  discounts 83 

Department  store  discounts 84 

Graded  discounts 84 

Anticipation  rates  and  past-due  rates    ....  86 

VI.    Terms  in  Relation  to  Business  Conditions    .     .  88 

The  business  cycle 88 

Terms  and  general  business  conditions       ...  89 

Movement  of  terms  in  particular  industries     .      .  91 

Discounts  and  business  conditions 92 

Wartime  changes 94 

Types  of  changes 95 

The  tendency  to  shorten  terms 98 

The  movement  to  standardize  terms     ....  101 

Wholesalers'  interest  in  terms 103 

Buying  and  selling  terms  of  wholesalers     .   ' .     .  106 


CONTENTS  xiii 

PART  II 
THE  TRADE  ACCEPTANCE  QUESTION 


FAOB 


VII.    The  Trade  Acceptance  Movement  in  the  United 

States 113 

Meaning  of  the  trade  acceptance 113 

The  trade  acceptance  before  and  after  the  Civil 

War 114 

The  trade  acceptance  and  the  Federal  Reserve  Act  115 

Work  of  the  Federal  Resei-ve  Board     ....  117 
The    trade    acceptance    movement — the    National 

Association  of  Credit  Men 120 

The  American  Trade  Acceptance  Council    .      .      .  122 

Work  of  the  bankers 124 

The  American  Acceptance  Council 126 

Trade  associations  and  the  trade  acceptance     .      .  128 

Opposition  to  the  trade  acceptance 130 

The  post-war  period 133 

Trade  acceptances  at  Federal  Reserve  Banks     .  136 

VIII.    Extent  of  Use  op  Trade  Acceptance     ....  139 

Surveys  of  the  use  of  the  acceptance     ....  140 

The  Federal  Reserve  Board  inquiry  of  1917     .      .  141 

Inquiries  of  trade-acceptance  advocates  in  1918  .  143 

Investigation  of  Messi-s.   Paine  and  Jenks     .      .  144 

Survey  of  1918 147 

Investigation  of  Park  Mathewson  in  1921      .      .  148 

Present  use  of  the  trade  acceptance     ....  149 

IX.    The  Net- Terms   System   versus  the   Cash-Dis- 
count System — Credit  Aspects       ....  153 

Alternative  systems  of  finance 153 

The  net-terms  system   and   the  trade-acceptance 

system 155 

The  problems  involved 156 

Fundamental   tests 157 

Agency  for  credit  measurement 158 

Relative  merit  of  seller  and  bank 160 

Cheeking  of  credit  by  the  local  bank     ....  161 

Analysis  of  types  of  industries 164 

Method  of  credit  measurement  by  the  bank     .      .  166 

Collection  of  accounts 169 

X.    The  Net-Terms   System   \^ersus  the   Cash-Dis- 
count System — Social  and  Banking  Aspects  173 
Effects  upon  business  practice 173 


xiv  CONTENTS 

PAGE 

Composition  of  the  business  community     .      .      .  175 

Relation  of  the  borrower  to  the  bank     ....  176 
Automatic    elasticity    of    volume    of    commercial 

paper 177 

Effects  upon  general  prices 179 

Prices  of  particular  goods 179 

The  discount  market 181 

Conclusions 182 


PART  III 

TERMS  NOW  IN  USE 

XI.    The  Foodstuffs  Industries     .     .    ■ 187 

Meat  packing 188 

Canning 190 

Flour  milling 192 

Sugar  refining 196 

Coffee,  tea  and  spices 197 

Confectionery 198 

Tobacco   manufactures 199 

Wholesale  groceries 200 

XII.     The  Metal  Industries 208 

Iron  and  steel 209 

Copper,  lead  and  zinc 211 

Hardware 215 

Mill  supplies  and  "machinery" 224 

Machinery *. 227 

Railway  equipment 229 

Shipbuilding 230 

XIII.     The  Automotive,  Agricultural  Implement,  Elec- 
trical AND  Fuel  Industries 232 

Automobiles 233 

Rubber  goods   237 

Automobile  accessories 240 

Agricultural  implements 242 

Electrical  products 254 

Coal  and  coke 257 

Petroleum 262 

XIY.    The  Textile  Manufacturing  and  Dry  Goods  In- 
dustries    268 

Cotton 269 

Silk 271 


CONTENTS  XV 

PAGH 

Woolen  and  worsted 279 

Hosiery 285 

Knit  underwear 287 

Laces  and  embroideries 288 

Wholesale  dry  goods 290 

Men's  wear  woolen  and  worsted  jobbing     .      .      .  300 

XV.    The  Apparel  and  Leather  Industries    ....  303 

Men's  clothing 304 

Women's  outer  garments 309 

Fur  manufacturing 314 

Millinery 316 

Tanning 319 

Boots  and  shoes 325 

XVI.    The  Lumber  and  Miscellaneous  Manufacturing 

Industries 331 

Lumber 332 

Office  furniture  and  store  fixtures 338 

Paint  and  varnish 340 

Glass  and  glassware 341 

Jewelry 343 

Optical  merchandise 348 

Wood  pulp  and  paper 349 

Drugs  and  Medicines 355 

Appendix.      Tabular    Statement    of    Terms    of 

Sale 362 


THE  MECHANISM   OF 
COMMERCIAL  CREDIT 


THE  MECHANISM  OF 
COMMERCIAL  CREDIT 


CHAPTER  I 

INTRODUCTION" 

The  outstanding  feature  of  modern  industry  is  the  long 
period  of  time  between  the  extraction  of  raw  materials  and 
their  final  delivery  in  some  useful  form  to  the  consumer. 
Production  is  not  a  simple,  direct,  hand-to-mouth  process. 
It  is  complex  and  roundabout.  No  article  is  completely 
produced  until  it  is  ready  for  use  by  the  ultimate  consumer. 
Production  consists  of  a  long  series  of  steps,  processes  or 
stages  and  involves  many  men  and  operations,  many  ex- 
changes and  bargains,  many  transfers  and  handlings  of 
goods.  All  this  takes  time.  Parallel  with  this  technical 
phenomenon  of  production  is  the  financial  phenomenon  of 
credit.  By  credit  we  mean  the  accommodation  which  one 
concern  extends  to  another  when  it  gives  valuable  things  in 
the  present  in  return  for  a  claim  to  be  paid  or  discharged 
in  the  future.  There  is  no  credit  in  a  barter  and  no  credit 
in  a  cash  exchange.  Credit  does  not  enter  where  transac- 
tions are  fully  closed  in  the  present. 

Meaning  of  Terms  of  Sale. — ^When  a  buyer  receives 
goods  from  a  seller  on  condition  that  he  will  pay  for  them 
in  the  future,  a  credit  relationship  is  established.  Usually 
it  is  established  upon  some  definite  basis,  and  is  expressed 
in  the  terms  of  sale  which  are  quoted.     Technically,  the 

3 


4        THE  MECHANISM  OF  COMMERCIAL  CREDIT 

terms  of  sale  specify  the  time  and  general  conditions  of  pay- 
ment by  the  buyer.  They  usually  consist  of  two  parts: 
the  one  part,  a  certain  period  of  time,  such  as  60  days, 
within  which  payment  of  the  amount  of  the  bill  is  due, 
without  being  subject  to  any  deduction;  the  other  part,  a 
certain  period  of  time,  usually  10  days,  for  payment  within 
which  the  deduction  of  a  specified  cash  discount,  such  as  2 
per  cent,  is  permitted  from  the  amount  of  the  bill.  The 
terms  then  generally  include  both  cash  discount  and  cash 
discount  period,  and  net  terms.  Using  the  illustrations 
just  cited,  they  will  be  quoted,  for  example,  as  2  per  cent 
10  days,  net  60  days. 

Certain  expressions  with  respect  to  terms  are  usually 
employed.  Terms  in  each  different  line  of  business  are 
relatively  uniform,  so  that  certain  terms  exist  in  such  cases 
which  are  recognized  as  ^'regular."  They  may  be  ''recom- 
mended" by  trade  associations  in  the  particular  line  and 
stage,  and  may  call  for  extra  time,  or  what  is  known  as  a 
^^  dating,"  in  addition  to  the  net  terms  which  would  other- 
wise be  quoted. 

But  terms  of  sale  cannot  be  considered  as  isolated  matters. 
They  are  inextricably  interlocked  with  many  other  financial 
and  industrial  matters.  They  are  intimately  related  to  the 
financial  problems  which  every  business  house  must  face; 
and  they  are  an  integral  part  of  the  general  credit  system. 
Both  of  these  in  turn  react  upon  and  influence  the  banking 
system.  In  other  words,  finance,  credit  and  banking  are  all 
closely  joined  together,  and  terms  of  sale  provide  one  of 
their  mainsprings.  As  a  result,  terms  have  many  ramifica- 
tions and  raise  many  collateral  questions,  relating  to  various 
parts  of  this  large  field.  It  is  necessary  to  set  them  in  their 
broader  framework  in  order  to  obtain  a  clear  understanding 
of  their  real  meaning  and  significance. 

Getting  Working  Capital, — Consider  a  medium  sized  or 
small  business  man  who  has  issued  neither  stocks,  bonds, 


INTRODUCTION  5 

nor  long  term  notes,  and  who  does  not  seU  his  paper  in  the 
open  market.  In  ease  his  own  funds  are  insufficient,  he  may 
obtain  the  working  capital  which  he  needs  for  his  ordinary 
operations  in  one  of  two  ways.  He  may  either  borrow  from 
his  bank  in  order  to  pay  wages  and  other  incidental  ex- 
penses, and  to  pay  cash  for  goods  which  he  buys,  or  else  he 
may  buy  these  goods  on  time  instead.  When  he  does  the 
latter,  he  owes  the  man  who  has  sold  him  the  goods,  and  not 
the  bank.  Although  credit  is  granted  in  both  cases,  in  the 
one  it  is  commercial  credit ;  in  the  other,  bank  credit. 

A  great  variety  of  factors  determine  which  of  these  two 
courses  the  individual  business  man  will  follow.  This  is 
true  even  of  the  relative  extent  to  which  the  same  man  will 
use  each  of  them,  and  buy  a  part  of  his  goods  on  time 
instead  of  paying  cash  with  funds  which  he  borrows  from 
the  bank.  In  large  measure,  these  factors  relate  to  the 
peculiar  conditions  which  surround  his  individual  business, 
but  in  many  ways  practice  is  the  same  for  all  those  engaged 
in  a  certain  kind  or  class  of  business. 

The  Commercial  Credit  System. — Consider  now  business 
houses  as  a  whole,  instead  of  the  individual  business  man. 
Some  houses  buy  for  cash  and  merely  owe  the  bank,  while 
others  buy  only  on  time  and  thus  owe  other  business  houses 
instead.  The  great  majority  perhaps  do  both,  and  buy  to 
some  extent  in  each  way — part  for  cash  and  part  on  time. 
They  likewise  sell  part  for  cash  and  part  on  time,  granting 
other  business  houses  the  option  of  paying  in  either  way 
which  they  themselves  are  granted  when  they  buy.  Each 
house  thus  has  certain  credit  relations  with  other  houses. 
Taken  together,  these  credit  relations  between  the  different 
houses  constitute  the  commercial  credit  system. 

This  system  is  almost  as  widespread  as  our  entire  eco- 
nomic life  and  economic  activity.  Through  it  the  tremen- 
dous volume  of  business  in  modern  economic  life  is  made 
possible.    It  serves  to  effect  the  exchange  of  these  masses  of 


6       THE  MECHANISM  OF  COMMERCIAL  CREDIT 

goods — goods  which  are  produced  uuder  a  system  of  di- 
vision of  labor  wherein  each  individual  and  each  group  of 
men  engage  in  that  occupation  for  which  they  are  relatively 
best  qualified.  The  system  serves  also  to  bind  together  the 
various  business  houses,  and  to  create  among  them  extensive 
and  intricate  interrelations  and  interdependence.  No  one 
can  stand  alone,  but  each  is  intimately  related  to  other 
houses,  so  that  disaster  to  one  often  carries  in  its  wake 
disaster  to  many  others. 

Analysis  of  the  System. — The  system  is  not  so  complex 
as  it  may  appear  to  be  at  first  sight.  The  fundamental 
features  are  relatively  simple  and  there  is  underlying  uni- 
formity in  certain  directions.  The  credit  relations  of 
certain  definite  groups  of  houses  are  similar,  and  the  system 
may  thus  be  resolved  into  several  component  parts.  To  do 
this,  it  is  necessary  first  to  analyze  the  economic  process 
whereby  goods  are  produced  and  then  moved  from  maker 
to  ultimate  consumer. 

The  economic  process  when  taken  in  cross  section  reveals 
several  distinct  stages.  Some  men  are  engaged  in  produc- 
ing raw  materials,  either  of  mineral  or  agricultural  nature ; 
others  fashion  these  materials  into  more  or  less  finished 
articles,  which  they  may  in  turn  resell  to  still  others  who 
further  manufacture  them.  The  spinner  sells  cotton  yarn 
to  the  cloth  manufacturer,  who  may  merely  make  grey  goods 
and  sell  them  to  the  converter,  who  in  turn  produces 
finished  cloth.  Merchants  may  next  purchase  this  cloth  and 
resell  it  to  retailers,  who  in  turn  dispose  of  it  to  the  final 
consumer.  The  extent  and  number  of  these  stages  of  course 
vary  greatly.  There  are  middlemen  who  deal  in  various 
agricultural  products,  while  articles  serving  as  producers' 
goods,  such  as  machinery,  are  often  sold  direct  by  manu- 
facturers to  those  who  use  them  as  part  of  their  plant 
equipment.  On  the  whole,  however,  the  major  stages  are 
quite  clearly  defined  for  any  one  line  of  business.    In  gen- 


INTRODUCTION  7 

eral,  they  may  be  considered  as  (1)  extraction,  (2)  manu- 
facture, (3)  wholesale  trading  and  (4)  retail  trading.  Each 
type  of  product  passes  through  the  economic  process  in  what 
is  the  regular  fashion  for  its  line,  and  spends  a  certain 
average  length  of  time  in  passing  through  each  of  the 
stages. 

Each  stage  has  fairly  well  defined  credit  relations  with 
the  other  stages  which  are  adjacent  to  it  in  the  process. 
Most  conspicuous,  perhaps,  is  the  wholesaler  and  his  rela- 
tions, on  the  one  hand,  with  the  manufacturer  from  whom 
he  buys  and,  on  the  other,  with  the  retailer  to  whom  he 
sells.  As  is  generally  known,  he  usually  buys  for  cash  and 
sells  on  time.  These  credit  relations  also  imply  certain 
definite  relations  on  his  part  with  the  banking  system.  He 
must  borrow  from  the  banks  for  a  two-fold  purpose — in 
order  to  pay  cash  for  his  purchases,  and  in  order  himself 
to  extend  credit  to  his  customers.  Similarly,  every  other 
stage  has  its  own  definite  relations.  At  the  commencement 
of  the  economic  process,  for  example,  raw  materials  are 
sold  for  cash  by  producers,  and  buyers  thus  resort  directly 
to  the  banks  for  the  funds  they  need.  Likewise,  at  the 
close  of  the  process,  consumption  goods  are  sold  at  retail 
in  considerable  measure  for  cash,  so  that  the  retailer  does 
not  have  to  borrow  from  the  bank  to  so  great  an  extent  in 
order  to  extend  credit  to  his  customers.  In  short,  every 
stage  has  its  own  definite  credit  and  banking  relationships. 
These  relationships  are  similar  in  a  general  way  for  certain 
types  of  business,  according  to  the  stage  in  the  economic 
process  in  which  they  belong,  and  irrespective  of  the  partic- 
ular goods  which  each  produces  or  handles.  The  credit 
and  banking  problems  of  a  hardware  wholesaler  are  similar 
to  those  of  a  wholesale  grocer — more  similar  in  many  ways 
than  are  the  problems  of  the  wholesale  grocer  to  those  of 
the  canner  who  sells  to  him. 

But  at  the  same  time  those  engaged  in  any  given  line  of 


8       THE  MECHANISM  OF  COMMERCIAL  CREDIT 

business  are  subject  to  the  same  influences.  The  hardware 
manufacturer,  the  hardware  wholesaler  and  the  hardware 
retailer  are  all  affected  by  the  ultimate  demand  for  their 
product.  The  manufacturer  sells  to  the  wholesaler,  who  in 
turns  sells  to  the  retailer,  and  there  is  thus  a  definite  con- 
tinuity and  interdependence  between  them.  Each  stage 
dovetails  with  and  fits  into  the  other.  This  applies  more 
particularly  to  the  credit  than  to  the  banking  problems, 
and  the  latter  feel  the  influence  somewhat  indirectly.  In 
any  event,  however,  it  is  useful  to  make  a  two-fold  classifica- 
tion according  to  the  kind  of  credit  and  banking  problem 
which  is  experienced — either  according  to  the  stage  in  the 
economic  process,  or  else  according  to  the  line  of  business. 

The  apparent  complexity  of  the  process  in  actual  life 
should  not  be  permitted  to  obscure  the  simple  fundamental 
features  which  lie  back  of  it,  and  have  just  been  explained. 
Significant  for  an  understanding  of  the  commercial  credit 
system  is  a  two-fold  division  of  the  economic  process,  ac- 
cording to  lines  of  business  and  according  to  stages.  The 
credit  and  banking  problems  of  any  individual  business  man 
are  in  considerable  measure  determined  for  him,  rather  than 
hy  him,  according  to  the  line  and  stage  in  which  he  finds 
himself.  Each  line  and  each  stage  has  its  definite  problems. 
With  respect  to  any  one  line  of  business,  the  interdepen- 
dence of  the  successive  stages  in  that  line  is  perhaps  most 
striking.  From  the  credit  point  of  view,  the  length  of  time 
which  the  article  passing  through  the  process  remains  in 
each  stage  is  of  special  importance  inasmuch  as  it  fixes  an 
upper  limit  to  the  time  for  which  any  one  stage  should  be 
granted  credit.  This  will  be  seen  more  inWy  in  Chapter  II. 
From  the  banking  as  well  as  from  the  credit 'point  of  view, 
the  peculiar  problems  which  are  found  in  certain  stages, 
notably  the  wholesale  stage,  are  perhaps  most  striking. 
However,  neither  division,  by  stage  or  by  line,  can  be  neg- 
lected, and  each  forms  the  logical  complement  of  the  other. 


INTRODUCTION  •     9 

Rtlation  to  Banking. — From  the  point  of  view  of  its 
relation  to  banking,  the  question  of  the  terms  employed 
and  hence  the  structure  of  the  commercial  credit  system, 
raises  in  the  first  place  the  question  how  the  paper  of  the 
merchant  or  manufacturer  gets  into  the  banks.  The  pri- 
mary question  is  this :  whose  paper  is  it — that  of  the  buyer 
or  of  the  seller,  and  in  what  form  is  it?  Where  cash  is 
paid,  and  the  buyer  discounts  his  bills  instead  of  paying 
only  at  the  close  of  the  net  period,  the  buyer  goes  directly 
to  the  bank  and  borrows  from  it.  Where  he  instead  takes 
the  net  terms,  the  seller  must  carry  him  and  extend  the  nec- 
essary credit.  To  do  this,  however,  the  seller  must  go  to 
his  bank  and  either  discount  the  note  or  acceptance  which 
he  may  have  received  from  the  buyer,  or  else  borrow  on 
his  own  paper  in  order  to  obtain  these  fmids.  In  the  first 
case  the  buyer  goes  directly  to  the  bank,  while  in  the  second 
case  the  seller  goes  to  the  bank  and  borrows  from  it  the 
funds  which  he  in  effect  loans  to  the  buyer  when  he  sells 
goods  to  the  latter  on  time.  In  the  first  case,  the  bank 
has  the  buyer's  paper;  in  the  second  case,  it  has 
either  the  seller's  paper,  or  the  buyer's  paper  endorsed  by 
the  seller. 

In  actual  practice  in  the  United  States  to-day,  buyers  are 
given  the  option  of  paying  cash  or  taking  time.  Thus  they 
naturally  divide  themselves  into  two  classes  according  to 
whether  or  not  they  either  possess  themselves  or  can  obtain 
from  the  bank  sufficient  funds  to  enable  them  to  pay  the 
seller  cash.  The  proposals  which  have  been  made  to  reform 
the  present  credit  system  and  to  introduce  widespread  use 
of  the  trade  acceptance  in  last  analysis,  however,  involve 
the  use  of  a  system  of  net  terms  only,  under  which  no  option 
is  granted  to  the  buyer,  and  paper  reaches  the  banks  only 
from  the  seller.  The  relative  merits  of  each  will  be  con- 
sidered fully  below.  At  this  point  it  can  merely  be 
indicated    that    there    is    involved    the    further    question 


10     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

whether  better  credit  measurement  is  obtained  under  the 
one  system  than  under  the  other. 

In  the  second  place,  the  terms  employed  raise  the  question 
of  the  length  of  time  for  which  the  bank  shall  make  its 
advances.  The  period  of  credit  which  it  grants  parallels 
the  period  of  mercantile  credit,  and  both  are  based  on  the 
length  of  time  for  which  the  borrower  or  buyer,  as  the  case 
may  be,  requires  the  funds.  This,  as  indicated  above,  is 
determined  by  the  length  of  time  which  the  article  he 
handles  takes  to  pass  through  his  stage  of  the  economic 
process.  The  terms  of  sale  are  important  from  the  point  of 
view  of  the  bank  in  this  way  as  well  as  in  the  way  just 
indicated. 

Scope  and  Purpose  of  the  Work. — The  framework  upon 
which  the  present  book  is  built  is  provided  by  the  commer- 
cial credit  system  described  above.  This  system  constitutes 
our  subject  of  study,  and  is  to  be  considered  from  several 
different  points  of  view.  Throughout  the  system  terms  of 
varying  descriptions  are  in  use.  But  throughout  the  struc- 
ture of  terms  which  exists,  certain  forces  are  at  work  to 
determine  the  terms  which  shall  be  used  under  any  given 
conditions.  It  is  not  mere  chance  that  manufacturers  sell 
men 's  straw  hats  on  a  single  season  dating,  while  wholesale 
grocers  usually  sell  their  goods  on  terms  of  1  per  cent  10 
days,  net  30  days.  Nor  is  it  mere  chance  that  cash  discounts 
as  high  as  7  per  cent  are  found  in  various  branches  of  the 
textile  industry,  while  manufacturers  of  iron  and  steel 
products  do  not  grant  discounts  in  excess  of  2  per  cent. 

The  first  purpose  of  the  present  work  is  to  consider  the 
forces  which  govern  the  terms  now  in  use,  and  which  de- 
termine what  the  terms  shall  be  in  each  line  and  stage,  and 
in  each  individual  case.  These  forces  are  clearly  susceptible 
of  analysis,  and  may  readily  be  discovered.  They  are  con- 
cerned in  large  part  with  the  merchandising  and  general 
business  practices  which  prevail.    They  relate  both  to  the 


INTRODUCTION  ,  11 

length  of  the  net  terras  (including  the  datings  granted)  and 
to  the  size  of  the  cash  discounts  quoted.  In  addition  to 
explaining  why  the  regular  terms  in  any  given  industry  are 
employed,  they  serve  also  to  explain  the  deviations  from 
these  terms  which  are  found  in  the  case  of  some  individual 
houses.  However,  the  standard  or  regular  terms  which  are 
the  result  of  these  forces  themselves  vary  over  a  series  of 
years  in  response  to  changes  in  general  business  conditions, 
and  attention  will  also  be  paid  to  the  manner  in  which  this 
variation  takes  place. 

The  second  purpose  is  to  evaluate  critically  the  present 
structure  of  terms  in  so  far  as  it  relates  to  the  present  com- 
mercial credit  system.  Various  efforts  at,  and  proposals  for 
reformation  of  the  system  have  been  made  in  recent  years, 
and  these  strike  at  the  very  fundamentals  of  the  system. 
Is  our  present  cash-discount  system  good,  bad  or  indiffer- 
ent? Has  it  outstanding  weaknesses,  and  if  so,  how,  if  at 
all,  may  they  be  remedied?  Is  it  worth  w^hile  to  attempt 
to  remedy  them?  Do  its  defects  exceed  its  merits,  and, 
furthermore,  is  there  another  and  superior  system  available 
to  supplant  it?  How  does  this  system  compare,  point  for 
point,  with  the  cash-discount  system?  Should  the  cash- 
discount  system  be  discarded  and  the  new  system — the  net- 
terms  or  trade-acceptance  system — be  put  in  its  place  ? 

Sources  of  Data  as  to  Terms. — To  answer  both  these  sets 
of  queries,  requires  the  use,  as  far  as  possible,  of  an  induc- 
tive method.  This  calls,  in  the  first  place,  for  comprehen- 
sive data  as  to  the  existing  terms  situation  and  as  to  mer- 
chandising and  business  practice  in  so  far  as  it  bears  on 
terms.  These  have  been  carefully  prepared  for  leading 
groups  of  industries,  so  as  not  only  to  show  the  existing 
situation,  but  also  to  illustrate  the  application  of  the 
forces  which  govern  terms.  They  are  presented  in  Part 
III,  Chapters  XI  to  XVI  inclusive,  of  the  present  work.  A 
comprehensive  body  of  actual  fact,  therefore,  provides  the 


12      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

basis  for  the  present  study.  These  data  have  been  care- 
fully analyzed  from  the  points  of  view  indicated  in  the 
preceding  section. 

The  data,  however,  are  limited  in  certain  directions. 
Terms  in  import  and  export  trade  are  not  included,  but 
domestic  trade  alone  is  considered.  Neither  are  terms  on 
agricultural  produce  and  other  absolutely  raw  materials  in- 
cluded, and  terms  in  retail  trade  are  also  omitted.  Where 
reference  is  made  to  these  fields,  it  is  necessarily  general 
in  character,  and  the  major  part  of  the  illustrations  are  thus 
drawn  from  the  other  fields  for  which  detailed  and  specific 
data  are  available.  The  general  forces  which  are  discussed, 
however,  are  universal  in  their  application  and  apply 
equally  to  both  fields. 

Previous  Studies. — Little  help  may  be  obtained  from 
previous  studies  of  the  subject  of  terms.  They  are  gener- 
ally both  scattered  and  fragmentary,  and  fall  roughly  into 
two  classes:  (1)  statements  of  terms  in  a  number  of  lines, 
and  (2)  discussions  of  the  situation  in  a  particular  industry. 
Most  of  the  regular  works  on  credits  and  collections  devote 
a  few  pages  to  the  subject,  usually,  however,  only  to  indi- 
cate the  nomenclature.  At  most,  a  chapter  is  devoted  to  a 
brief  discussion  of  principles  and  a  statement  of  the  situa- 
tion in  a  few  leading  lines,  as,  for  example,  in  Volume  8  of 
the  Modem  Business  Series  of  the  Alexander  Hamilton 
Institute.  The  Credit  Monthly,  and  its  predecessor,  the 
Bulletin  of  the  National  Association  of  Credit  Men,  con- 
tain a  few  brief  statements,  and  so  also  does  Rinsfoos' 
book  on  Purchasing.  Some  material  may  also  be  found 
in  various  other  scattered  works,  such  as  the  Banking  Law 
Journal  Year  Book  for  1915,  on  Commercial  Paper  and 
Bills  of  Exchange,  and  Kniffin,  Commercial  Paper. 

In  general,  however,  these  works  have  the  defect  of  being 
mere  statements  of  facts  with  respect  to  regular  terms. 
Little  or  no  attempt  is  made  to  analyze  and  indicate  the 


INTRODUCTION  13 

factors  which  determine  what  terms  shall  be  employed,  and 
in  most  cases  no  marketing  and  other  data  necessary  for 
an  understanding  of  the  terms  are  appended.  Analysis 
is  found  to  a  greater  extent  in  discussions  of  terms  in  a 
given  industry.  Prominent  among  this  class  of  works  are 
addresses,  reports  of  committees  on  terms,  and  discussions 
at  trade  association  conventions,  as  well  as  discussions  at 
group  meetings  at  the  conventions  of  the  National  Associa- 
tion of  Credit  Men.  From  time  to  time,  articles  also  appear 
in  trade  and  less  frequently  financial  journals.  The  former 
also  contain,  at  times,  statements  of  the  policy  of  individual 
business  houses  as  to  terms.  Certain  studies  dealing  with 
particular  industries  also  consider  the  problem  at  greater 
or  lesser  length.  Among  these  may  be  mentioned  Onthank, 
The  Tanning  Industry  and  Dodd,  Luniberhig,  both  pub- 
lished by  the  Robert  Morris  Associates,  several  studies  of 
the  Miscellaneous  Series  of  the  Bureau  of  Foreign  and 
Domestic  Commerce,  for  example.  No.  34,  relative  to  men's 
clothing,  several  of  the  studies  of  the  Federal  Trade  Com- 
mission, especially  those  on  agricultural  implements,  and 
Cherington,  The  Wool  Industry.  In  all  of  these,  consider- 
able data  as  to  marketing  are  included. 

The  above  discussion  relates  solely  to  the  question  of  ma- 
terial on  the  existing  terms  situation.  With  respect  to 
reforming  the  commercial  credit  system,  there  has  been  a 
great  body  of  literature  relative  to  the  trade-acceptance 
and  cash-discount  systems  in  recent  years.  This  will  be 
indicated  at  the  appropriate  place  in  Part  II. 

Divisions  of  the  Work. — In  view  of  the  considerations 
noted  above,  the  present  work  will  be  divided  into  three 
principal  parts.  The  first  part  will  analyze  the  existing 
structure  of  terms  from  the  point  of  view  of  the  forces 
which  operate  throughout  that  structure  to  determine  the 
terms  in  use.  In  Chapters  II  to  V  inclusive,  the  forces  will 
be  successively  indicated  which  determine  the  standards  as 


14     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

to  length  of  net  terms  and  datings,  and  the  size  of  the  cash 
discounts  which  are  granted.  Chapter  VI  will  consider  the 
forces  which  cause  the  standards  or  regular  terms  them- 
selves to  change  in  harmony  with  changes  in  general 
business  conditions.  In  all  six  chapters,  illustrations  will 
be  drawn  from  various  lines  to  show  the  operation  of  each 
of  the  forces  or  factors  which  are  discussed. 

Chapters  VII  to  X  inclusive  will  carry  out  the  second 
purpose  of  the  present  work.  Chapters  VII  and  VIII  will 
afford  a  background  by  treating  specifically  of  the  present 
use  of  the  trade  acceptance  and  indicating  its  growth  in 
recent  years.  After  this,  the  present  structure  of  terms 
will  be  considered  from  a  critical  point  of  view  and  con- 
trasted with  the  net-terms  trade-acceptance  system  which 
has  been  strongly  advocated  in  some  quarters  in  recent 
years.  In  drawing  these  contrasts,  the  several  questions 
already  mentioned  will  be  considered  in  detail. 

Finally,  the  third  part  of  the  work  will  be  primarily  de- 
scriptive in  character.  It  will  afford  a  comprehensive  state- 
ment of  the  terms  actually  in  use,  and  will  also  enable  the 
reader  to  observe  the  operation  of  the  forces  indicated  in 
Part  I.  Chapters  XI  to  XVI  inclusive  will  therefore  give 
a  description  of  the  present  terms  situation  in  leading 
groups  of  industries.  In  these  chapters  both  terms  and  tlie 
marketing  situation  in  so  far  as  it  relates  to  terms  will  be 
presented.  These  chapters  are  based  upon  material  pre- 
pared by  the  writer  which  appeared  in  various  issues  of 
the  Federal  Reserve  Bulletin  in  1919  and  1920, 


PART  I 
FACTOES  GOVERNING  TERMS 


CHAPTER  II 


LENGTH    OF    NET    TERMS 


In  proceeding  to  analyze  terms  of  sale,  it  is  necessary 
to  commence  with  the  net  terms.  As  will  be  seen  later,  the 
cash  discounts  are  intimately  related  to  them,  while,  further- 
more, similar  factors  are  at  work  in  both  cases.  These 
factors  determine  both  the  length  of  the  net  terms  and  the 
size  of  the  cash  discounts  which  are  granted.  With  respect 
to  the  length  of  the  net  terms,  the  factors  consist  chiefly 
in  an  elaboration  of  three  central  points.  They  operate 
throughout  the  economic  process  as  a  whole,  and  irrespective 
of  the  particular  industries  in  question.  They  operate  in 
retail  trade  as  well  as  wholesale,  and  in  the  case  of  wheat  as 
well  as  machinery.  Each  of  the  three  factors  will  be  con- 
sidered in  turn. 

The  Fundamental  Factor 

To  understand  the  fundamental  factor  governing  the 
length  of  the  net  terms,  goods  should  be  divided  into  several 
classes.  First  are  articles  bought  either  to  work  up  or  to 
resell  in  the  same  form.  They  serve  the  purchaser — 
whether  manufacturer  or  merchant — as  circulating  capital. 
They  are  destined  to  be  turned  over  within  a  relatively 
short  period  of  time  and  thus  be  converted  into  cash,  with 
which  payment  may  be  either  made  for  them  or  other  goods 
may  be  purchased,  and  the  cycle  repeated.  Second  are  ar- 
ticles which  are  bought  for  use  by  the  purchaser  as  fixed 
capital,  as,  for  example,  machinery.  It  yields  only  a 
relatively  small  return  year  by  year,  so  that  the  purchaser 
must  either  have  the  funds  to  pay  cash  for  it,  or  else  obtain 

17 


18     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

a  definite  loan  of  capital.  The  machinery  itself  cannot 
provide  the  funds.  Third  are  articles  in  the  hands  of  the 
retailer  in  final  form  ready  for  consumption.  The  consumer 
either  pays  cash  from  funds  on  hand,  or  else  defers  payment 
until  the  next  pay  day.  Obviously,  the  articles  themselves 
do  not  provide  the  means  of  payment.  Each  of  these  three 
classes  of  goods  requires  separate  treatment,  and  will  be 
discussed  in  succession. 

In  order  to  simplify  the  discussion,  consider  first  articles 
bought  for  resale.  In  any  given  transaction,  when  is  the 
buyer  able  to  pay  the  seller  for  the  goods  which  he  has 
purchased?  When  he  has  funds  in  hand.  Assuming  that 
the  capital  which  he  has  invested  in  his  business  is  fully 
employed,  this  depends  upon  the  time  when  he  not  only  sells 
the  particular  article  which  he  has  purchased,  but  when  he 
himself  receives  payment  for  it  from  the  person  to  whom  he 
in  turn  has  sold  it.  He  must  wait  until  he  himself  receives 
payment  before  he  can  in  turn  pay  his  own  bill.  In  other 
words,  his  ability  to  pay  depends  upon  the  rapidity  with 
which  he  turns  over  the  goods,  or  rather  the  capital  which 
the  goods  represent.  In  technical  economic  language,  this 
period  or  interval  between  the  incurring  of  cost  and  the 
receipt  of  payment  when  sold  may  be  termed  his  marketing 
period.  For  the  individual  buyer,  it  may  reasonably  and 
naturally  become  accepted  as  the  standard  for  the  length 
of  the  net  terms  which  he  is  granted. 

This  analysis  may  be  carried  one  step  further.  In  the 
case  of  any  given  article,  the  buyer's  marketing  period 
ultimately  depends  upon  how  rapidly  the  final  consumer 
buys  the  article.  He  fixes  the  rate  of  consumption,  and 
this  is  refiected  back  to  each  of  those  who  handle  it  in 
turn.i  Tjjg  slowing  up  in  the  distribution  of  goods  in  1920 
as  a  result  of  the  buyers'  strike,  with  its  drop  in  sales  and 

*It  is  also  reflected  back  ultimately  even  to  the  machinery  which 
produces  the  article  in  question. 


LENGTH  OF  NET  TERMS  19 

accumulation  of  inventories  by  manufacturers  and  whole- 
salers as  well  as  retailers,  clearly  illustrates  this. 
In  other  words,  in  last  analysis,  the  length  of  the  net  terms 
in  any  one  stage — whether  manufacture,  mercantile  or  re- 
tail— and  the  buyer's  marketing  period,  are  but  a  reflection, 
perhaps  modified  somewhat  under  certain  conditions,  of 
what  may  be  termed  the  consumption  period  for  the  partic- 
ular article  in  question.  This  is  the  fundamental  economic 
factor.  It  is  reflected  more  immediately  in  any  one  stage 
through  the  buyer's  marketing  period.  The  manufacturer's 
technical  production  period — the  time  required  for  the 
manufacture  of  the  article  in  question — is  entirely  subordi- 
nate to  the  marketing  period.  The  aim  of  the  technician  is 
merely  to  have  the  production  period  not  in  excess  of  the 
marketing  period. 

But  this  is  by  no  means  the  entire  story.  The  principle 
or  factor  may  be  applied  in  a  variety  of  ways,  and  more- 
over, as  will  be  seen  later,  it  merely  tends  to  set  an  upper 
limit  to  the  length  of  the  net  terms,  instead  of  absolutely 
fixing  their  length.  It  is  therefore  necessary  first  to  illus- 
trate the  various  applications  of  the  principle,  in  order  to 
see  exactly  how  it  operates.  It  should  he  remembered, 
however,  that  it  is  exceedingly  difficult  to  obtain  examples 
where  other  factors  are  absent  and  which,  therefore,  show 
merely  the  influence  of  a  single  factor.  Thus  the  use  of  any 
particular  illustration  implies  that  the  factor  in  question  is 
powerful  enough  to  be  observed  in  the  selected  case,  rather 
than  that  it  is  the  sole  factor  in  operation. 

Nature  of  the  Article.: — Both  the  consumption  period 
and  the  marketing  period  in  any  one  stage  vary  with  the 
nature  of  the  article.  Four  points  must  be  considered:  (1.) 
whether  the  sale  involves  a  large  or  a  small  amount;  (2) 
whether  the  article  is  preservable  or  perishable;  (3) 
whether  it  is  standardized  or  subject  to  changes  in  fashion 
or  style;  and  (4)  whether  it  is  for  seasonal  or  for  recurrent 


20     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

use.  The  article,  moreover,  may  either  merely  turn  over 
slowly,  or,  in  other  eases,  may  involve  considerable  risk  and 
not  be  sold  at  all,  thus  becoming  a  total  loss. 

1.  The  influence,  especially  to  the  consumer,  of  the 
amount  involved  in  the  sale,  is  seen  when  contrasting  a 
house,  automobile,  piano  or  diamond  ring  with  a  newspaper, 
box  of  candy  or  alarm  clock.  The  contrast  has  been  well( 
drawn  by  Mr.  S.  Y.  Ball  in  the  following  language  •?■ 

Cash  is  readily  available  for  the  small  pirrchase;  but  as  the 
amount  involved  increases  and  becomes  sizable,  we  reach  and  pass 
beyond  the  consumer's  immediate  financial  ability.  Time  in  which 
to  accumulate  ftarther  money  is  necessary — so  terms  are  arranged 
— and  months,  even  years,  are  granted  the  purchaser  within  which 
gradually  to  pay  over  the  sale  price.  So  that,  in  the  jewelry 
business,  those  who  specialize  on  merchandise  involving  large 
amounts,  notably  diamonds  and  diamond  jewelry,  very  properly 
prepare  to  help  finance  the  long  time  required  by  the  ultimate 
consumer  to  complete  payment.  On  the  other  hand,  our  friends 
who  have  made  the  alarm  clock  a  profitable  small  sale  for  the 
jeweler,  with  equal  propriety  ask  and  receive  payments  practically 
spot  cash. 

Similar,  though  far  less  striking,  are  the  reasons  under- 
lying the  terms  on  canned  goods.  They  are,  as  a  rule, 
bought  in  quantities  to  cover  requirements  of  a  longer 
period  of  time  than,  say,  meats,  and  hence  carry  longer  net 
terms  (30  days,  or  less  frequently  60  days)  in  order  to 
induce  their  movement  in  larger  quantities. 

2.  The  effect  which  the  degree  of  perishability  has  upon 
the  terms  is  well  illustrated  in  the  case  of  meats.  Packers 
usually  sell  fresh  meats  to  retail  dealers  on  a  weekly  basis, 
and  in  some  cases  they  collect  by  a  specified  day  of  the 
week  for  all  deliveries  during  the  preceding  week.  On  the 
other  hand,  cured  meats  and  canned  meats  are  sold  to  a 
considerable   extent   on    30-day   terms.     On    a   distinctly 

*  Report  of  the  Committee  on  Terms  and  Discounts,  National 
Wholesale  Jewelers'  Association,  presented  at  the  June,  1920,  con- 
vention. 


LENGTH  OF  NET  TERMS  21 

perishable  article,  especially  if  the  buyer  does  not  possess 
much  financial  strengrth,  terms  cannot  very  well  be  long  if 
the  seller  may  have  to  take  back  the  merchandise  in  the 
event  of  non-payment  of  his  bill. 

3.  The  degree  of  standardization  has  a  complex  influence 
upon  terms.  Standardization,  as  Mr.  Ball  notes  in  the 
report  just  quoted,  may  refer  either  to  price  or  to  quality, 
while  in  another  sense  distinction  between  standard  and 
non-standard  goods  is  paralleled  roughly  by  the  distinction 
between  luxuries  and  necessities.  In  ordinary  times  stand- 
ard goods  may  be  purchased  as  needed  from  day  to  day. 
Hence,  to  draw  an  illustration  from  the  jewelry  industry, 
American  watches  and  clocks  and  sterling  and  plated  silver- 
ware are  sold  on  short  terms.  Manufacturers,  in  general, 
grant  one  month  to  wholesalers  on  all  these  items  except 
clocks,  where  terms  range  from  10  to  30  days.  Further- 
more, when  such  lines  are  advertised  and  the  customer  is 
educated  in  advance  as  to  price  and  quality,  le^  need 
exists  for  stocking  up  such  merchandise  for  purposes  of 
display  and  selection.  On  the  other  hand,  non-standard 
goods  need  to  be  stocked,  arranged,  examined  and  discussed 
as  to  price  and  quality.  The  ultimate  customer  makes  his 
selection  when  it  is  convenient  for  him,  and  makes  it  from 
the  goods  which  the  dealer  displays.  Terms  must  be 
lengthened  correspondingly,  and  in  the  jewelry  business 
diamonds,  watches  and  imported  jewelry,  therefore,  require 
longer  terms.  Only  as  the  goods  are  delivered  by  the  seller 
at  the  time  they  are  wanted  by  the  buyer,  will  shorter  terms 
normally  be  found.  Absence  as  far  as  possible  of  stocking- 
up  of  merchandise,  such  as  women's  apparel,  by  the  seller 
in  fact  is  found  largely  in  lines  where  the  style  risk  is 
great.  This,  however,  raises  the  entire  question  of  the 
system  whereby  the  article  is  marketed,  to  be  considered  in 
more  detail  later. 

4.  Several  of  the  factors  just  indicated  point  to  the 


22      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

difference  between  seasonal  and  current  use  of  the  mer- 
chandise. Goods  sold  for  current  use  do  not  remain  long 
in  the  hands  of  the  buyer,  and  st)  he  is  not  entitled  to  long 
terms.  Packers,  for  example,  very  properly,  rarely  grant 
terms  longer  than  one  week  on  fresh  meats.  Again  auto- 
mobile tires  during  the  spring  and  summer  are  promptly 
resold  by  dealers,  and  carry  terms  of  5  per  cent  10th  prox- 
imo (tenth  day  of  the  following  month).  During  the  winter, 
however,  dealers  accumulate  a  stock  of  tires,  and  receive 
a  spring  dating  in  order  to  enable  them  to  make  sales  and 
collections  with  the  advent  of  the  new  season.  The  influ- 
ence of  this  factor  is  even  more  pronounced  in  an  industry 
which  has  but  one  season  a  year.  Manufacturers  of  men's 
straw  hats  therefore  sell  to  jobbers  on  a  May  1  dating  and 
to  retailers  on  a  June  1  dating.  Terms  on  goods  for  seasonal 
use,  however,  involve  the  entire  question  of  datings,  which 
will  be  treated  in  detail  later. 

When  viewed  in  a  somewhat  different  way,  the  nature 
of  the  article  may  be  more  specifically  related  to  the  con- 
sumption period.  Articles,  in  general,  may  be  classified 
as  absolute  necessities ;  semi-necessities,  or  articles  necessary 
for  comfort;  and  luxuries.  These  three  groups  of  articles 
differ  distinctly  in  regularity  of  use,  rapidity  of  turnover 
and  constancy  of  demand.  Food  must  be  regularly  eaten, 
and  within  a  relatively  short  period  of  time  after  its  prepa- 
ration. The  amount  spent  for  it  is  much  less  affected  by 
adverse  conditions  than  is  the  amount  spent  for  either  of 
the  other  two  groups.  The  demand  for  it  thus  possesses 
an  element  of  regularity  which  is  found  to  a  much  lesser 
extent  in  the  case  of  semi-necessities,  and  is  lacking  in  the 
case  of  luxuries.  The  consumption  periods  differ  accord- 
ingly. This  difference  is  distinctly  reflected  in  the  terms 
generally  found  for  each  group  of  articles. 

"Pay-Day"  Terms. — The  time  when  the  buyer  is  able 
to   pay   for   goods   merely   reflects  the  time   when   those 


LENGTH  OF  NET  TERMS  23 

who  purchase  from  him  in  turn  are  able  to  pay.  The 
ability  of  the  second  buyer  to  pay  is  then  reflected  back 
to  the  original  buyer  and  perhaps  in  turn  to  the  seller  of 
the  goods  in  the  original  transaction.  This  was  illustrated 
in  the  quotation  above  from  Mr.  Ball's  report  as  to  terms 
in  various  branches  of  the  jewelry  industry,  where  the 
wholesaler  found  it  necessary  to  consider  the  time  when 
the  consumer  would  be  able  to  pay  the  dealer.  It  is  readily 
apparent  that  this  is  likewise  the  case  with  terms  in  seasonal 
industries.  But  perhaps  the  best  illustrations  are  found  in 
the  case  of  articles  of  current  consumption  sold  to  retailers. 
In  such  cases,  "pay-day"  terms  may  be  employed.  Packers 
sell  on  these  terms  in  railroad,  steel  mill  and  mining  towns, 
where  the  retailer  carries  the  worker  from  one  pay  day  to 
another,  and  where  the  due  date  of  his  bills  is  accordingly 
adjusted  to  the  pay  days,  frequently  being  semimonthly. 
Recent  laws  in  certain  states  requiring  the  payment  of 
wages  twice  a  month,  are  said  to  have  rendered  possible 
the  material  reduction  of  such  terms. 

The  distinction  sometimes  made  by  packers  and  whole- 
sale grocers  between  their  terms  to  the  city  and  to  the 
country  trade  also  takes  account  of  the  consumer's  ability 
to  pay  the  retailer.  Several  packers  grant  weekly  terms  to 
their  city  trade,  as  against  from  two  weeks  to  a  month  to 
their  country  trade.  A  grocer  in  the  Rocky  Mountain  sec- 
tion states  that  in  the  largest  cities  weekly  payments  are 
the  rule,  and  in  industrial  cities  bi-weekly  paj^ments,  while 
country  sales  carry  the  regular  terms  of  1  per  cent  10  daj^s, 
net  30  days.  These  differences  are  explained  by  the  fact 
that  in  the  largest  cities  business  activities  are  diversified, 
with  frequent  receipt  of  funds  by  consumers,  and  conse- 
quent ability  to  pay  the  retailer  regularly  and  at  short 
intervals.  In  industrial  cities,  however,  pay  days  must 
be  considered,  while  in  the  country  consumers  have  no 
regular  and  recurring  source  of  income. 


24      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Customary  Settlement  Dates. — Allied  in  some  ways  to 
the  pay  days  just  indicated  are  the  customs  peculiar  to 
certain  localities,  which  have  ^own  up  with  respect  to  the 
time  when  settlements  of  obligations  are  to  be  made.  In 
their  inception  these  undoubtedly  bore  a  relation  to  the 
ability  of  the  purchaser  to  pay,  but  in  some  cases  they 
appear  at  present  to  represent  a  survival  of  tradition,  rather 
than  to  have  a  more  substantial  basis  in  present  conditions. 
Various  illustrations  of  the  practice  may  be  given.  In 
San  Francisco  the  custom  is  still  found  to  some  extent  of 
settling  twice  a  month  on  the  so-called  "steamer  days" — 
the  14th  and  the  28th — on  which  steamers  formerly  arrived. 
Again,  forty  years  ago,  April  1  was  the  customary  settle- 
ment date  in  the  territory  known  as  "Pennsylvania  Dutch." 
This  was  adhered  to  in  certain  sections,  such  as  in  Berks 
and  Lancaster  counties,  until  comparatively  recently,  and 
rendered  it  difficult  for  jobbers  some  years  ago  to  introduce 
the  regular  hardware  terms.  In  the  Middle  West,  March  1 
still  continues  to  be  the  regular  settlement  date  for  pur- 
chases of  farm  lands. 

Geography  of  Terms. — Carrying  out  further  the  thought 
of  a  customary  settlement  date,  it  will  be  observed  that 
certain  sections  of  the  country  have  certain  seasons  of  the 
year  in  which  their  entire  payments  are  concentrated.  The 
classic  illustration  is  afforded  hy  the  one-crop  agricultural 
sections.  From  the  proceeds  of  their  crop  they  pay  for  the 
products  which  they  have  obtained  on  credit  during  the 
growing  season  from  other  sections.  Broadly  speaking, 
then,  their  marketing  period  may  be  regarded  as  running 
from  the  time  of  planting  in  the  spring  until  the  time  of 
marketing  in  the  fall.  These  sections  are  twofold:  (1) 
the  South,  with  its  cotton  crop;  (2)  the  Northwest,  with 
its  grain  crop.  Prior  to  the  fall  of  1920,  however,  the 
South  had  been  prosperous  for  several  years  as  a  result  of 
the  high  price  of  its  cotton  and  tobacco,  and  as  a  conse- 


LENGTH  OF  NET  TERMS  25 

quence  terms  granted  in  wholesale  groceries,  for  example, 
were  approaching  closer  and  closer  to  the  standards  in 
effect  in  other  parts  of  the  country.  The  same  is  true  in 
the  West.  Several  middle-western  millers  note  a  change 
during  the  past  several  years  in  terms  on  carload  shipments 
of  flour  to  intermountain  territory,  and  there  is  a  tendency 
for  the  former  30  to  90  days'  open-account  terms  to  be 
replaced  by  arrival-draft  terms. 

Further  forms  of  geographical  differentiation  of  terms 
may  be  cited.  These  illustrations,  which  are  taken  entirely 
from  the  wholesale  grocery  line,  relate  likewise  to  seasonal 
influences,  but  consider  also  the  minor  crops  and  more 
restricted  sections  of  the  country.  In  Georgia  payments  are 
prompter  and  more  purchasers  discount  their  bills  in  the 
fall  and  winter,  while  in  the  Kentucky  tobacco  sections,  on 
the  other  hand,  an  extension  of  60  days  is  often  requested 
in  the  fall,  as  the  crop  moves  somewhat  later.  In  Okla- 
homa payments  are  concentrated  after  the  harvest,  and  few 
discount  their  bills  during  the  growing  season.  An  Omaha 
firm  noted  in  1919  that  the  only  overdue  accounts  it  had 
were  those  of  some  far-western  customers  selling  to 
ranchers,  who  carried  the  latter  until  either  the  stock  or 
the  wool  clip  was  sold.  Sectional  differences  are  thus  found 
in  the  payment  activity  of  buyers,  both  with  respect  to  the 
proportion  of  accounts  past  due  and  the  proportion  dis- 
counted, as  well  as  in  the  terms  which  are  specified. 

Terms  on  Manufacturers'  Raw  Materials. — Terms  on 
goods  which  are  to  serve  as  raw  material  for  a  manufac- 
turer, as  contrasted  with  goods  bought  for  resale,  involve 
no  special  considerations.  They  are,  however,  ordinarily 
short.  Thus,  taking  the  principal  raw  material  which 
enters  into  a  given  product,  cotton  print  cloths  are  generally 
sold  on  terms  of  net  10  days,  as  are  also  grege  goods  to  silk 
converters.  Likewise,  in  the  men's  hat  industry,  hat  bodies 
in  the  rough,  forming  the  raw  material  for  the  dry  shops 


26     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

which  finish  and  trim  the  hats  complete  and  ready  for  sale, 
carry  regular  terms  of  net  30  days.  The  same  is  true  of 
auxiliary  materials  such  as  fuel.  Coal  and  coke  are  sold, 
both  by  producers  and  wholesalers,  largely  on  terms  of  net 
30  days. 

In  all  these  cases,  however,  certain  of  the  factors  also 
apply  which  have  already  been  considered  as  making  for 
shorter  terms.  In  every  instance  the  article  in  last  analy- 
sis may  be  regarded  as  perishable,  for  its  identity  is  soon 
lost,  while  in  addition  in  certain  instances  it  is  distinctly 
for  recurrent  as  contrasted  with  seasonal  use.  A  further 
factor,  which  will  be  discussed  in  detail  in  the  following 
chapter,  concerns  the  difi'erence  in  relative  economic 
strength  between  buyer  and  seller. 

Terms  on  Fixed  Capital  Goods. — The  second  class  of 
goods  are  those  destined  to  serve  as  fixed  capital  goods  to 
the  buyer.  They  require  far  more  detailed  analysis  than 
do  circulating  capital  goods.  In  general,  the  buyer  himself 
is  expected  to  own  his  fixed  equipment.  He  therefore 
should  pay  either  cash  or  else  what  approximates  cash ;  for 
instance,  within  30  days,  for  additions  which  he  makes 
to  it,  as  well  as  for  repairs  and  replacements.  This  is  like- 
wise true  in  the  case  of  certain  articles  for  which  the 
delivery  in  effect  is  delayed,  payment  merely  being  adjusted 
according  to  time  of  delivery.  A  leading  manufacturer  of 
machine  tools  grants  60  days,  90  days  or  even  4  months  on 
large  tools  which  cannot  be  made  available  for  use  at  once, 
in  place  of  the  regular  terms  of  net  30  days.  Similarly, 
manufacturers  of  power  machinery  make  exception  to  the 
regular  terms  of  net  30  days  in  cases  where  the  machinery 
is  to  be  erected,  or  when  the  amount  of  the  order  is  large, 
and  the  process  of  manufacture  takes  some  time.  The  terms 
differ  somewhat  with  the  individual  manufacturer,  but  in 
general  an  initial  payment  is  required,  followed  by  others 
at  specified  intervals,  and  a  final  payment  upon  completion 


LENGTH  OF  NET  TERMS  27' 

of  the  work.  Thus  the  terms,  for  example,  may  call  for 
60  per  cent  upon  shipment,  20  per  cent  in  30  days  there- 
after, and  20  per  cent  when  the  material  has  been  erected. 
In  any  event,  payment  is  made  regnilarly  as  the  work 
progresses. 

Shipbuilders'  terms  afford  another  illustration.  They 
provide  for  an  initial  payment  upon  execution  of  the  con- 
tract, usually  for  5,  10  or  15  per  cent  and  in  rare  cases  20 
per  cent  of  the  purchase  price.  Subsequent  payments  of 
equal  amount  are  required  when  certain  steps  in  the  build- 
ing of  the  vessel,  such  as  laying  the  keel,  plating,  launching, 
etc.,  have  been  completed.  The  number  of  payments  varies 
with  the  type  of  vessel  and  the  estimated  time  required  for 
completion,  but  is  stated  to  be  approximately  10  or  12.  The 
final  installment,  varying  from  5  to  10  per  cent,  is  generally 
due  upon  completion  and  delivery  of  the  vessel. 

An  additional  point  arises  in  connection  with  terms  on 
the  builders'  hardware  which  manufacturers  sell  direct  to 
the  contractor  or  consumer  in  New  York  City  and  vicinity. 
It  is  the  custom  to  require  payment  of  85  per  cent  of  each 
month's  deliveries  by  the  10th  of  the  following  month,  and 
the  remaining  15  per  cent  in  30  days  after  the  completion 
of  the  building  operation.  In  this  case,  the  terms  on  fixed 
capital  goods  are  applied  to  articles  which  in  fact  repre- 
sent merely  circulating  capital  to  the  buyer,  albeit  cir- 
culating capital  which  is  not  of  the  kind  ordinarily  con- 
sidered. 

Carrying  the  Purchaser. — In  certain  cases  manufac- 
turers of  fixed  capital  goods  will  carry  the  purchaser  for 
some  time,  instead  of  actually  specifying  cash.  Such  credit 
is  of  course  outside  the  realm  of  ordinary  trade  accommo- 
dation, as  is  also  time  in  excess  of  his  customary  marketing 
period  granted  a  buyer  of  goods  for  further  manufacture 
or  resale.  In  either  case,  a  loan  of  capital  on  a  more 
permanent  basis  is  made.     The  buyer's  ability  to  pay  for 


28     THE  MECHANISM  OP  COMMERCIAL  CREDIT 

fixed  capital  goods  arises  from  factors  outside  the  goods 
themselves,  and  the  amount  involved  is  relatively  larger 
than  in  the  case  of  circulating  capital  goods.  Hence  pro- 
vision is  usuallj'^  made  for  installments  which  periodically 
reduce  the  total  amount  due  the  seller,  while  he  retains  title 
to  the  goods  until  the  buyer  makes  the.final  payment.  More 
definite  security  and  greater  safeguards  are  thus  introduced 
than  in  the  case  of  circulating  capital  goods. 

The  general  factor  determining  the  extent  to  which  sellers 
in  any  given  industry  carry  purchasers  of  capital  goods 
will  be  fully  discussed  in  the  following  chapter.  Practice 
naturally  varies  according  to  the  industrj'^  in  question.  In 
some  lines  where  the  use  of  these  terms  is  rare,  such  as  in 
connection  with  manufacturers'  sales  of  railway  equipment, 
each  individual  case  will  be  considered  on  its  merits,  while 
in  other  industries,  where  the  practice  is  more  frequent, 
fairly  definite  norms  or  standards  have  been  established. 
In  general,  the  terms  call  for  payment  of  part  of  the  amount 
upon  delivery,  followed  by  subsequent  more  or  less  period- 
ical payments.  In  the  case  of  articles  specially  manufac- 
tured, an  initial  payment  may  be  required  with  the  order. 
Where  machines  are  sold  on  such  terms,  the  seller  usually 
secures  himself  by  retaining  a  direct  interest  of  one  kind 
or  another  in  the  article  until  it  is  fully  paid  for.  He 
may  do  this  by  means  of  a  chattel  mortgage,  a  conditional 
sale  or  a  lease  agreement  whereby  he  retains  title  and 
merely  leases  the  machine  to  the  buyer  until  final  payment 
is  made.  Practice  on  this  point  varies  according  to  the  laws 
of  the  several  states. 

An  illustration  of  such  terms  is  afforded  by  dealers  who 
sell  machine  tools  on  time.  They  require  an  initial  cash 
payment,  such  as  1/2  or  1/3,  with  order  or  upon  receipt  of 
bill  of  lading,  and  cover  the  balance  by  interest-bearing 
notes  maturing  monthly  for  three,  four,  or  in  some  cases 
six  months.     They  either  retain  title  or  else  use  a  chattel 


LENGTH  OF  NET  TERMS  29 

mortgage.  A  larger  item  naturally  carries  longer  time. 
Manufacturers  who  sell  printing  machinery  on  time  require 
an  initial  payment  of  about  1/4,  and  the  balance  is  due 
■within  24  months,  being  represented  by  interest-bearing 
notes  maturing  monthly  and  secured  by  a  lien  on  the 
machinery. 

In  some  cases  securities  issued  by  the  purchaser  are 
accepted  in  payment  for  fixed  capital  goods.  Prior  to  1917, 
it  was  reported  the  general  practice  in  certain  cases,  such 
as  for  large  bulk  cargo  ships,  to  accept  one-half  the  purchase 
price  in  first  serial  bonds,  maturing  in  from  1  to  10  years. 
A  study  made  in  1916  indicates  that  in  some  cases  cotton 
mill  stock  and  bonds  were  accepted  in  payment  for 
machinery. 

Terms  in  Retail  Trade. — The  third  class  of  goods  are 
those  in  the  hands  of  retailers  in  final  form  ready  for  con- 
sumption. Retailer's  terms  are  likewise  determined  by  the 
buyer's  ability  to  pay.  When  the  consumer  cannot  pay 
cash,  he  is  carried  until  he  periodically  receives  funds, 
whether  from  returns  for  services  rendered  or  from  returns 
on  capital  invested.  Bills  due  for  articles  purchased  for 
cui;jrent  use  are  rendered  regularly,  as  in  the  case  of  the 
* '  pay-day ' '  terms  considered  above.  For  larger  items,  such 
as  household  effects,  time  is  often  required,  and  the  install- 
ment plan  is  in  vogue.  In  place  of  payment  out  of  savings 
from  past  earnings,  payment  from  current  earnings  is  made. 
Terms  on  items  such  as  pianos  or  furniture  parallel  the 
terms  which  have  just  been  considered  on  power  machinery, 
etc,  and  provide  the  counterpart  in  what  may  be  called  the 
consumptive  field  to  the  other  terms  in  the  industrial  field. 

The  Marketing  Period  in  Relation  to  the  Bank. 3-— The 
bank  which  lends  to  a  business  man  must  consider  his 
marketing  period,  as  well  as  the  party  who  sells  him  on 

*  Compare  the  writer's  Some  Aspects  of  Banlcing  Theory  (New 
York,  1920),  Chap.  iv. 


30      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

time.  In  last  analysis,  the  bank  lends  in  order  to  supply 
him  with  current  working  capital,  which  he  then  generally 
uses  to  purchase  goods  or  materials  for  further  manu- 
facture or  for  resale.  The  bank  merely  puts  itself  in 
the  place  of  the  business  man  who  would  otherwise 
have  sold  the  merchandise  in  question  to  the  borrower 
on  time. 

But  the  bank  does  not  consider  merely  a  specific  lot  of 
goods.  Rather  does  it  consider  all  the  goods  handled  by 
the  borrower — in  other  words,  the  totality  of  his  operations, 
both  purchases  and  sales.  Its  horizon  is  thus  broader  than 
that  of  any  single  seller.  For  it,  the  buyer's  marketing 
period  is  rather  a  seasonal  thing.  It  asks  itself  the  question : 
when  will  this  particular  man  be  able  to  clean  up  the 
accommodation  received  from  us.  At  that  time  it  expects 
complete  liquidation  of  his  loans.  For  it,  therefore,  the 
borrower's  marketing  period  on  part  of  his  line  of  credit 
may  well  exceed  the  time  required  to  move  any  specific 
lot  of  merchandise.  This  seasonal  period  sets  the  upper 
time  limit  for  the  bank '3  loans.  Furthermore,  because  it 
finances  a  number  of  firms  in  any  given  industry,  its  in- 
terest and  outlook  is  broader  than  that  of  any  single 
individual,  and  the  consumption  period  for  the  industry 
may  often  become  a  more  real  factor  to  it. 

The  Marketing  System 

The  second  factor  which  determines  the  length  of  the 
net  terms  is  the  system  whereby  the  article  in  question  is 
marketed.  The  purchaser  may  merely  buy  the  goods  as  he 
needs  them,  or  he  may  buy  for  stock.  In  the  first  case  his 
marketing  period  is  short,  and  the  time  Avhicli  he  requires 
is  correspondingly  short.  To  the  extent  that  he  buys  for 
stock,  his  turnover  becomes  less  rapid  and  his  marketing 
period  is  lengthened,  as  is  also  the  time  which  he  requires. 
Taking  the  case  of  a  sale  by  a  manufacturer  to  a  retailer, 


LENGTH  OF  NET  TERMS  31 

the  upper  limit  to  the  time  which  may  be  extended  is  fixed 
by  the  length  of  time  which  the  merchandise  is  made  in 
advance  of  purchase  by  the  final  consumer.  To  the  extent 
that  the  article  is  manufactured  in  advance  of  purchase  by 
the  final  consumer,  there  is  a  period  during  which  either 
the  manufacturer  or  the  retailer  may  carry  it,  and  to  the 
extent  that  the  retailer  carries  it,  the  terms  which  he  re- 
ceives are  correspondingly  lengthened. 

The  present  problem  may  appear  to  be  merely  an  elabora- 
tion of  several  of  the  points  outlined  at  the  opening  of 
the  chapter  in  considering  the  underlying  principle.  In 
particular,  the  difference  between  seasonal  and  current 
use  was  mentioned  at  that  point,  in  connection  with  the 
discussion  of  the  nature  of  the  article.  But,  while  there  is 
some  truth  in  this  view,  the  problem  in  fact  is  of  prime 
importance.  It  is  intensified  by  the  system  of  production 
for  a  market  instead  of  to  order,  which  is  a  distinguishing 
characteristic  of  the  present  economic  order.  Moreover, 
it  is  far  wider  in  scope,  and  involves  also  the  question  of 
the  division  of  the  carrying  burden  between  the  several 
factors  in  the  economic  process,  such  as  the  manufacturer, 
the  wholesaler  and  the  retailer. 

Industry  as  a  whole  bears  a  certain  burden  of  waiting 
from  the  time  of  initial  production  of  an  article  until  the 
time  of  final  consumption,  as  well  as  a  credit  risk  in  con- 
nection with  such  waiting.  Some  participant  in  the  process 
— manufacturer,  wholesaler  or  retailer — must  assume  the 
burden.  The  terms  which  are  granted  determine  who  shall 
do  this.  Thus  they  push  these  disadvantages  backward  or 
forward,  or  else  locate  them'in  the  middle  of  the  economic 
process  whereby  any  given  article  is  produced  and 
distributed. 

Some  Illustrations. — The  custom  tailor  may  purchase  his 
woolens  in  one  of  two 'ways.  He  may  go  to  a  woolen  jobber 
and  select  certain   styles,   purchasing  one   or  more   suit 


32      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

lengths  of  each  pattern,  which  he  then  keeps  in  stock  and 
cuts  up  as  he  receives  orders  from  customers  to  whom  he 
has  displayed  them.  In  this  case  he  keeps  the  goods  in 
stock,  and  furthermore  runs  the  risk  of  not  selling  some  of 
them.  To  avoid  this  he  may  instead  purchase  his  woolens 
only  as  needed.  In  this  event  he  arranges  with  one  of  the 
so-called  book  houses  for  a  set  of  their  samples,  which  he 
displays  to  the  customer.  When  the  latter  has  made  a 
selection  he  orders  a  suit  length  of  the  particular  style  from 
the  book  house.  In  this  case,  he  shifts  to  the  book  house 
both  the  burden  of  keeping  the  goods  in  stock,  and  the  risk 
of  not  selling  some  of  them.  Accordingly,  the  terms  which 
he  is  granted  differ  greatly  in  the  two  cases.  He  receives 
long  time  where  he  stocks  the  merchandise,  while  he  pays 
cash  where  he  takes  it  only  as  he  needs  it.  The  association 
of  old  line  woolen  jobbers  has  recommended  terms  of  7  per 
cent  10  days,  6  per  cent  30  days,  5  per  cent  60  days,  net 
4  months,  with  invoices  dated  ahead  about  two  months,  and 
these  represent  the  standard  jobbers'  terms.  On  the  other 
hand,  a  large  proportion  of  the  customers  of  book  houses 
send  cash  with  order,  or  accept  C.  O.  D.  shipments. 

While  this  case  may  appear  merely  to  afford  the  buyer 
the  option  of  making  his  purchases  in  one  of  several  ways, 
when  examined  in  the  reverse  manner,  it  appears  that  a 
similar  alternative  is  open  to  the  seller.  The  book  houses, 
in  fact,  avail  themselves  of  it,  as  they  usually  conduct  a 
regular  jobbing  business  also.  In  between  the  two  alterna- 
tives, and  somewhat  akin  to  each,  is  consignment  business. 
This  was  widely  employed  some  years  ago  by  manufacturers 
of  auto  tires,  as  well  as  prior  to  1912  in  the  case  of  over 
50  per  cent  of  the  fur  manufacturing  industry,  but  it  has 
steadily  lost  ground  wherever  it  has  been  used.  While  it 
is  true  that  in  such  eases  the  goods  have  not  actually  been 
purchased  by  those  to  whom  they  are  shipped,  nevertheless 
the  time  granted  is  automatically  adjusted  to  the  marketing 


LENGTH  OF  NET  TERMS  33 

period.  The  retailer  is  granted  credit  for  a  period  exactly 
equal  to  the  time  during-  which  he  carries  the  merchandise. 

Two  further  illustrations  of  the  interrelation  between 
terms  and  marketing  methods  are  instructive.  Accompany- 
ing the  decrease  in  the  length  of  manufacturers'  terms  on 
agricultural  implements  has  been  the  fact  that  dealers  do 
not  place  as  large  initial  stock  orders  as  formerly,  while 
direct  shipments  from  factories  to  dealers  have  also  de- 
creased, so  that  the  manufacturers  themselves  are  required 
to  carry  larger  stocks  at  distributing  points.  On  the  other 
hand,  consider  refiners'  terms  on  sugar  in  the  summer  of 
1920.  The  normal  terms  are  2  per  cent  for  payment  within 
7  days  after  arrival,  or  10  days  from  date  of  delivery  in 
the  case  of  local  deliveries  by  truck.  In  order  to  help  carry 
stocks  and  prevent  sacrifice  sales,  with  consequent  demoral- 
ization of  the  market,  refiners  extended  credit  at  that  time. 
By  doing  this  they  recognized  that  a  newer  and  slower 
buyers'  marketing  period  existed  at  that  price  level,  and 
adjusted  their  OAvn  terms  accordingly.  Buyers  in  effect 
were  purchasing,  partly  at  least,  for  stock,  rather  than  for 
current  use  only,  and  the  marketing  system  had  changed 
accordingly. 

The  forces,  which  determine  exactly  in  what  proportion 
the  time  elapsing  between  the  manufacture  of  the  article 
and  its  final  sale  to  the  consumer  is  divided  between  the 
manufacturer  and  the  retailer,  will  be  considered  in  detail 
in  Chapter  IV  when  discussing  the  theory  of  datings.  This 
division  of  time,  however,  by  no  means  alters  the  fact  that 
the  manufacturer  in  last  analysis  actually  assumes  the 
burden  of  financing  in  either  case.  He  provides  the  funds 
which  the  merchandise  represents,  whether  he  himself  holds 
the  article  or  whether  the  retailer  holds  it.  It  should  also 
be  noted  that  the  problem  concerns  largely  articles  which 
will  be  consumption  goods  in  their  final  form  rather  than 
production  goods. 


34     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

The  Wholesaler's  Credit  Function. — The  wholesaler 
plays  a  prominent  role  in  the  marketing  system.  The 
orthodox  view  considers  an  article  passing  from  manufac- 
turer to  wholesaler  and  in  turn  from  wholesaler  to  retailer. 
In  this  system  the  Avholesaler  performs  certain  services 
which  are  well  known.  For  the  present  purpose  the  out- 
standing feature  is  the  assembling  of  a  variety  of  goods 
produced  by  a  large  number  of  different  manufacturers. 
The  wholesaler  then  keeps  the  merchandise  in  stock  and 
subsequently  passes  it  on  to  a  large  number  of  different 
retailers  as  the  latter  desire  it.  Gathering  these  goods 
together  from  a  multiplicity  of  sources  he  then  distributes 
these  same  goods  when  and  where  they  are  needed.  In 
technical  economic  language,  he  takes  the  form  utilities 
which  the  manufacturer  has  created,  and  adds  to  them 
time  and  place  utilities.  Most  conspicuous  among  the  lines 
in  which  he  operates  are  groceries,  hardware,  dry  goods  and 
drugs. 

In  selling  to  the  larger  number  of  different  retailers, 
wholesalers  also  perform  what  may  be  termed  their  credit 
function.  They  lighten  the  manufacturer's  credit  work  by 
making  it  necessary  for  him  to  keep  check  only  on  a  smaller 
number  of  wholesalers  instead  of  on  a  multiplicity  of  re- 
tailers. The  wholesalers  themselves  keep  check  on  the 
retailers.  But  they  do  even  more.  They  not  merely  inter- 
vene in  the  capacity  of  credit  men,  but  they  also  take  over 
from  the  manufacturer  to  some  extent  the  burden  of  supply- 
ing the  funds  which  the  goods  they  are  engaged  in  passing 
from  manufacturer  to  retailer  represent.  In  other  words, 
the  burden  is  divided  between  manufacturer  and  whole- 
saler, instead  of  being  confined  to  the  manufacturer,  as  was 
the  case  in  the  illustration  given  above. 

The  extent  to  which  the  burden  is  divided  will  differ 
according  to  whether  or  not  the  particular  industry  is 
strongly  of  a  seasonal  character.    In  non-seasonal  industries, 


LENGTH  OF  NET  TERMS  39 

the  wholesaler  generally  buys  for  cash  (by  discounting  his 
bills),  stocks  the  merchandise,  ships  only  as  ordered  by  the 
retailer,  and  sells  on  time.  In  highly  seasonal  industries, 
on  the  other  hand,  the  entire  time  elapsing  between  the 
manufacture  of  the  article  and  its  final  sale  by  the  retailer 
is  more  definitel}^  divided  between  manufacturer  and  whole- 
saler. The  manufacturer's  terms  to  the  wholesaler 
generally  call  for  payment  at  a  definite  season  date  (assum- 
ing that  the  latter  discounts  his  bills),  and  the  wholesaler 
then  carries  the  retailer  until  a  further  net  due  date. 

Manufacturers'  and  Wholesalers'  Terms. — There  are 
numerous  variations  in  actual  practice  from  the  orthodox 
marketing  system.  Several  of  them  are  of  particular  im- 
portance in  relation  to  terms.  In  some  leading  industries 
the  regular  marketing  chain  runs  from  manufacturer  to 
retailer.  This  is  the  case,  for  example,  with  meat  packing 
and  men 's  and  women 's  clothing,  as  well  as  with  industries 
concerned  with  capital  items  such  as  machinery  or  agri- 
cultural implements.  In  all  these  industries  the  range  of 
products  handled  is  greatly  narrowed  and  the  manufac- 
turer himself,  in  part  at  least,  must  perform  the  jobber's 
function  of  maintaining  an  adequate  stock  of  goods  as  well 
as  the  credit  function.  In  other  industries  marketing 
methods  vary  with  the  different  manufacturers.  Some  sell 
direct  to  the  retailer,  while  others  sell  to  the  wholesaler, 
or  else  the  same  manufacturer  sells  to  both.  Examples  are 
afforded  by  industries  as  dissimilar  as  boots  and  shoes  and 
confectionery.  In  such  industries  the  problem  arises  of 
the  relation  which  manufacturers'  terms  to  wholesalers 
generally  bear  to  manufacturers'  terms  to  retailers.  This 
depends  very  largely  upon  the  extent  to  which  retailers  as 
well  as  wholesalers  in  any  given  industry  buy  in  advance 
of  their  immediate  needs.  Where  the  retailer  does  this, 
and  therefore  stocks  the  article  to  some  extent,  there  is 
generally  a  tendency  in  non-seasonal  lines  for  manufac- 


36      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

turers'  terms  to  retailers  to  be  either  longer  than  their 
terms  to  wholesalers,  or,  where  they  are  the  same,  for  the 
retailers  to  take  full  time  instead  of  discounting  their  bills, 
and  thus  to  be  carried  for  a  corresponding  period  by  the 
manufacturer.  Where  the  retailer,  however,  merely  buys 
for  immediate  resale,  while  the  wholesaler  stocks  the  article, 
the  situation  as  to  terms  is  reversed.  The  lighter  refined 
petroleum  products,  such  as  gasoline  and  kerosene,  at  pres- 
ent generally  bear  terms  of  net  30  days  in  the  case  of  carload 
shipments,  which  are  made  to  oil  jobbers  who  have  bulk 
storage  and  who  barrel  or  can  the  product,  and  then  ship 
them  to  factories,  garages,  and  storekeepers.  On  the  other 
hand,  net  cash  is  largely  required  for  tank  wagon  deliveries 
and  filling  station  sales. 

In  highly  seasonal  industries  where  the  wholesaler  must 
stock  the  merchandise,  while  it  is  shipped  to  the  retailer 
only  as  he  requires  it,  manufacturers'  formal  terms  to 
retailers  may  well  be  shorter  also.  The  wholesaler  may 
receive  a  season  dating,  whereas  the  retailer  may  receive 
merely  net  30  days,  although  his  payment,  according  to 
these  terms,  will  not  be  due  until  after  the  wholesaler's  is 
due.  In  the  glove  industry  prior  to  1915,  for  example, 
manufacturers'  terms  to  retailers  were  largely  6  per  cent 
10  days,  60  days  extra  (that  is,  due  in  70  days),  whereas 
their  terms  to  wholesalers  were  largely  6  per  cent  10  days 
or  5  per  cent  30  days,  with  season  datings  of  May  1  and 
November  1  on  season  shipments,  but  with  only  30  days 
extra  between  seasons. 

In  industries  where  some  sales  are  made  directly  to  re- 
tailers by  manufacturers,  as  well  as  to  wholesalers,  the 
further  question  arises  of  the  relation  which  manufacturers' 
terms  to  retailers  bear  to  wholesalers'  terms  to  retailers. 
In  some  cases  there  may  be  no  difference,  but  in  other 
cases,  especially  in  industries  in  which  the  wholesaler  plays 
only  a  minor  role,  wholesalers  tend  to  sell  the  poorer  class 


LENGTH  OF  NET  TERMS  37 

of  retailers,  and  to  maintain  their  position  in  part  at  least 
through  the  fact  that  they  grant  longer  terms  to  retailers 
than  manufacturers  grant.  Thus  the  small  number  of 
jobbers  of  meat  products  in  the  larger  centers  often  grant 
terms  of  2  per  cent  10  days,  net  60  days  as  compared  with 
maximum  terms  extended  b}^  packers  of  1  per  cent  10  days, 
net  30  days.  Similarly,  leather  jobbers,  on  the  whole,  sell 
to  smaller  accounts  which  the  tanners  would  not  solicit,  and 
their  collections  are  generally  believed  to  be  less  prompt, 
although  in  some  cases  at  least  their  quoted  terms  do  not 
differ  from  tanners'  terms. 

In  this  discussion  the  orthodox  wholesaler  has  alone  been 
considered,  while  no  attention  has  been  given  to  the  specu- 
lative or  trading  jobber,  who  is  found  for  example  in  the 
non-ferrous  metal  industries  or  (to  a  greatly  increased  ex- 
tent during  the  war  period)  in  the  various  branches  of  the 
textile  industry.  A  jobber  of  the  latter  description  does 
not  form  a  regular  connecting  link  between  manufacturer 
and  retailer,  but  competes  with,  as  well  as  buys  from,  the 
manufacturer.  Where  goods  are  scarce  his  aim  is  to  have 
some  available  in  a  sort  of  open  market  in  the  trade,  and  his 
business  is  perhaps  most  accurately  described  as  a  form  of 
price-difference  trading.  His  terms  will  be  considered  in 
the  course  of  the  next  chapter. 


CHAPTER  III 

LENGTH    OF    NET    TERMS     (CONTINUED) 

In  the  preceding  chapter  two  of  the  factors  which  influ- 
ence the  length  of  net  terms  were  considered:  (1),  the 
underlying  factor,  and  (2),  the  marketing  system  whereby 
the  article  is  brought  from  producer  to  final  consumer.  In 
the  present  chapter  the  third  factor  will  be  considered, 
namely  the  general  competitive  conditions  which  exist  in 
the  industry  in  question,  and  the  variety  of  ways  in  which 
the  influence  of  this  factor  manifests  itself.  After  this  is 
done  several  special  aspects  of  the  general  question  of  the 
length  of  net  terms  will  be  discussed. 

General  Competitive  Conditions 

Those  changes  in  terms  which  occur  over  a  period  of  time 
in  response  to  changes  in  general  business  conditions  are 
not  due  to  general  competitive  conditions,  in  the  sense  in 
which  the  expression  is  here  employed.  Nor  is  reference 
made  to  changes  in  the  market  for  a  particular  article,  such 
as  occur,  for  example,  when  war  time  scarcity  disappears 
in  the  face  of  new  sources  of  supply  opened  by  the  return 
to  peace.  Instead,  consideration  is  given  rather  to  the  situa- 
tion which  prevails  in  the  industry  at  a  given  moment  of 
time,  and  which  exists  with  respect  to  the  relative  economic 
strength  of  buyers  and  sellers  in  that  line.  In  every  indus- 
try there  is  a  usual  or  customary  relation  which,  broadly 
speaking,  remains  unchanged  over  a  period  of  time.  This 
relation  between  the  economic  strength  of  the  two  parties 
exerts  great  influence  upon  the  terms  which  are  employed, 

38 


LENGTH  OF  NET  TERMS  39' 

and  in  particular  determines  whether  or  not  the  length  of 
the  terms  shall  equal  the  buyer's  full  marketing  period. 
In  some  cases,  however,  it  may  determine,  not  what  the 
terms  shall  be,  but  rather  to  what  extent  the  regular  or 
standard  terms  specified  are  actually  observed.  The  general 
competitive  conditions  which  govern  the  relation  are  varied, 
and  so  also  is  their  influence  upon  the  terms. 

Relative  Size  of  Buyer  and  Seller. — It  is  necessary  first 
to  consider  the  relative  size  on  the  whole  of  the  buyer  and 
the  seller  in  the  particular  industry  in  question.  A  small 
weak  seller  tends  to  receive  cash  from  a  large  strong 
buyer.  Thus  the  farmer  receives  cash  for  his  cattle  from 
the  packer  who  purchases  them.  On  the  other  hand,  how- 
ever, large  buyers  who  are  in  a  strong  position  may  attempt 
to  force  concessions  from  smaller  and  weaker  sellers,  al- 
though this  may  take  the  form,  as  will  be  seen  in  a  later 
chapter,  of  paying  cash  and  endeavoring  to  obtain  a  cor- 
respondingly larger  discount  in  consequence.  Turning 
from  large  buyers  to  large  sellers,  firms  which  are  in  a 
strong  position  and  sell  to  smaller  buyers  may  do  one  of 
two  things :  either  shorten  the  time  (perhaps  indirectly  by 
increasing  the  cash  discount)  or  deliberately  follow  a  policy 
of  carrying  the  buyer  for  his  entire  marketing  period.  Both 
policies  have  been  pursued,  the  use  of  the  former  depending 
upon  the  position  which  the  seller  holds  in  the  market. 

Competition  or  Concentration  among  Buyers  and  Sellers. 
— Closely  related  in  some  cases  to  the  question  of  the  rela- 
tive size  of  buyers  and  sellers  is  the  question  of  the  relative 
degree  of  competition  or  concentration  among  each.  Cer- 
tain of  the  illustrations  which  will  be  given,  accordingly, 
show  the  influence  of  size  as  well  as  of  competition  or 
concentration.  As  a  general  rule,  the  greater  the  degree 
of  competition  among  the  sellers,  the  more  the  concessions 
which  they  must  make,  and  vice  versa,  the  greater  the  de- 
gree of  concentration,  the  more  they  are  able  to  dictate  the 


40      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

terms.  A  similar  situation  exists  in  the  case  of  competition 
or  concentration  respectively  among  the  buyers.  The  in- 
fluence of  the  sellers'  situation  may  be  illustrated  by 
contrasting  sugar  refiners'  terms  with  those  of  coffee 
roasters  and  spice  grinders.  Sugar  refining  is  a  highly 
concentrated  industry,  and  it  has  been  stated  that  a  refinery 
of  the  best  type  requires  a  capital  of  perhaps  $2,000,000  or 
$3,000,000.^  Coffee,  tea  and  spices,  on  the  other  hand,  are 
highly  competitive  lines.  Terms  of  sugar  refiners  are  short 
— largely  2  per  cent  7  days  after  arrival  of  shipment  or 
10  days  from  date  of  delivery  in  the  case  of  local  deliveries 
by  truck — while  terms  on  roasted  coffee  are  largely  2  per 
cent  10  days,  net  60  days,  and  terms  on  ground  spices  are 
largely  1  per  cent  10  days,  net  30  days. 

The  influence  of  concentration  among  the  sellers  is  also 
seen  when  contrasting  the  situation  in  the  iron  and  steel 
industry  before  and  after  about  1900.  Prior  to  that  time, 
terms  were  very  irregular,  often  being  made  to  suit  the 
special  needs  of  particular  purchasers.  In  general  they 
were  also  long.  One  authority  states  that  they  often  ran 
from  4  to  8  months,  but  with  substantial  cash  discounts, 
while  another  states  that  quarterly  settlements  were  fre- 
quent, although  oftentimes  an  extension  bearing  interest 
was  granted.  Since  about  1900  each  of  the  principal  classes 
of  product  has  carried  certain  regular  terms,  the  general 
net  period  being  30  days,  with  a  cash  discount  on  certain 
items  of  1/2  per  cent  or  1  per  cent  10  days.  Bolts  and 
nuts  afford  a  more  recent  illustration  from  this  same  gen- 
eral field.  This  industry  is  relatively  concentrated,  and 
there  are  not  over  25  producers.  About  1912  they  made  an 
unsuccessful  effort  to  reduce  the  terms  from  2  per  cent  10 
days,  net  60  days,  but  several  years  later  succeeded.  This 
was  in  spite  of  the  strong  resistance  of  the  hardware  job- 

*  Jenks  and  Clark,  The  Trust  Problem,  Rev.  Ed.  (Garden  City  and 
New  York,  1920),  p.  139. 


LENGTH  OF  NET  TERMS  41 

bers,  who,  however,  handle  only  a  small  part  of  the  total 
output,  as  the  major  part  is  sold  direct  by  manufacturers 
to  industrial  consumers.  Present  terms  are  therefore  1 
per  cent  10  days,  net  30  days. 

In  industries  where  strong  competition  exists  between  the 
sellers,  terms  lack  uniformity  and  in  addition  may  tend  to 
be  long  and  to  be  poorly  observed.  In  the  bituminous  coal 
industry  west  of  Pittsburgh,  a  buyers'  market  almost  uni- 
formly prevails,  while  to  the  east  supply  and  demand  are 
more  nearly  equal,  and  there  is  a  corresponding  difference 
in  the  degree  to  which  business  terms  may  be  insisted  upon. 
In  the  lumber  manufacturing  industry,  it  is  estimated  that 
there  are  upward  of  40,000  operators.  These  operators  are 
of  several  classes,  and  each  class  has  its  distinctive  type  of 
terms.  Very  small  operators  without  yards,  who  put  their 
product  in  transit  as  soon  as  cut,  generally  employ  terms 
calling  for  part  cash,  such  as  10  per  cent  or  more,  with  or- 
der and  balance  on  receipt  of  notice  of  shipment.  A  second 
class  of  terms  relates  to  special  contracts  drawn  to  cover  a 
considerable  period  of  time,  and  these  vary  according  to  the 
individual  case.  A  third  class  are  those  recommended  by  the 
American  Lumber  Congress  and  by  certain  manufacturers' 
associations,  and  are  in  general  2  per  cent  10  days  or  15 
days  from  date  of  invoice  or  5  days  after  arrival  of  car,  net 
60  days  from  date  of  invoice.  Deviation  from  these  recom- 
mended terms  is  frequent. 

Finally,  the  larger  markets  are  often  influential  in  forcing 
more  liberal  terms.  Particularly  is  this  the  case  in  the  lead- 
ing wholesale  lines.  The  effort  in  1918  to  shorten  net  whole- 
sale hardware  terms  in  the  south  to  30  days  was  hindered 
by  the  fact  that  the  large  middle  western  centers,  such  as 
Chicago,  St.  Louis  and  Louisville,  continued  on  the  60-day 
basis,  although  the  same  cash  discount  of  2  per  cent  10 
days  was  given  in  both  cases.  Again,  greater  standardiza- 
tion   of  wholesale  grocers*  terms  prevails  in  the  middle 


42      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

west  and  west.  This  is  due  partly  to  the  fact  that  where- 
as in  some  other  markets,  such  as  New  York  and  Chicago, 
there  are  manufacturing  jobbers  who  do  to  a  great  extent 
a  national  and  semi-national  business,  and  traders  who 
sell  staple  goods  for  cash  at  cut  prices,  in  addition  to  houses 
which  do  tlie  usual  wholesale  grocery  business,  in  the  sec- 
tions mentioned  houses  are  more  or  less  generally  of  the  last 
type.  In  these  sections,  moreover,  less  competition  is  ex- 
perienced from  exclusive  tea  and  coffee  and  other  specialty 
jobbers  than  in  the  more  thickly  populated  territories. 
Turning  to  a  totally  different  industry,  a  leading  hosiery 
manufacturer  states  that  he  lengthens  net  terms  by  30  days 
in  highly  competitive  markets,  such  as  New  York,  Chicago 
and  Cleveland. 

Cash  Outlay,  Profits  Margin  and  Capital  Position  of  the 
Seller. — The  conditions  under  which  the  article  is  produced 
also  influence  the  length  of  the  net  terms  which  manufac- 
turers grant.  An  important  factor  is  the  amount  of  cash 
outlay  involved  for  labor  and  materials  in  manufacturing 
the  goods.  This  has  been  stated  as  follows  by  Mr.  Ball  in 
the  report  to  which  reference  was  made  in  the  preceding 
chapter : 

Where  the  cash  outlay  constitutes  a  larg-e  part  of  the  selling 
price,  terms  will  be  short — where  it  represents  a  small  part  of  the 
selling  price,  terms  will  lengthen.  That  is  why  in  recent  years, 
with  labor  and  material  costs  rapidly  rising,  we  have  constantly 
been  adidsed  of  the  necessity  for  shorter  terms.  The  more  nearly 
goods  represent  cash  the  quicker  they  must  be  exchanged  for 
cash. 

Such  conditions  are  found  in  industries  which  are  other- 
wise widely  dift'erent.  Mr.  Ball  was  discussing  jewelry 
terms,  but  the  same  point  has  been  made  by  a  leading  pro- 
ducer of  lead  and  zinc.  A  builder  of  railway  cars  has 
described  the  similar  conditions  which  exist  in  his  industry 
as  follows : 


LENGTH  OF  NET  TERMS  43 

The  building  of  freight  and  passenger  ears  is  largely  a  ques- 
tion of  assembling  semi-finished  and  finished  materials  and,  after 
performing  certain  work  on  the  same,  erecting  the  finished  ears. 
The  cost  of  the  materials  to  ns  represents  usually  about  70  to 
80  per  cent  of  the  selling  price  of  the  car,  and  as  a  general  rule 
the  margin  of  profit  is  small.  The  car  builder  has  to  pay  cash 
for  all  of  this  material  and  for  the  labor,  so  unless  he  can  receive 
prompt  payment  for  the  finished  cars  his  margin  of  profit  will 
soon  disappear  in  interest  charges. 

It  will  be  noted  that  in  this  quotation  a  second  factor  is 
also  listed,  namely  the  seller's  margin  of  profit.  This  is 
of  importance  also  in  connection  with  the  cash  discount 
specified.  The  applicability  of  this  point  to  the  hardware 
wholesaler  has  been  indicated  as  follows : 

The  jobber's  line  extends  through  many  gradations  of  items, 
from  the  basic  necessities  to  the  line  of  luxuries,  and  the  further 
away  they  grade  from  these  lines  of  necessity  and  nearness  to 
raw  material,  the  gi'eater  the  profit  and  the  less  need  for  quick 
tumover.2 

Related  in  some  ways  to  these  two  factors,  as  well  as  to 
the  size  of  the  seller,  is  the  question  of  his  capital  position. 
The  influence  of  this  factor  is  seen  when  contrasting  the 
situation  of  manufacturers  of  machine  tools  with  that  of 
manufacturers  of  mill  supplies.  In  the  words  of  a  leading 
dealer, 

the  former  are  generally  made  by  manufacturers  who  are  well 
organized  and  who  have  sufficient  capital.  In  a  great  many  lines 
of  machine  tools,  furthermore,  their  customers  are  largely  dealers 
who  are  well  established  and  whose  rating  is  first  class.  The 
manufacturer  therefore  is  not  obliged  to  woriy  about  his  money 
and  prefers  to  wait  30  days  rather  than  offer  a  premium  for 
pre-paynrient.  Mill  supplies  are  made  in  a  great  many  cases  by 
smaller  manufacturers,  who  possibly  are  not  so  well  financed  as 
the  machine  tool  manufacturei*s  and  the  custom  of  offering  a 

*W.  M.  Bonham,  "Terms  of  Sale  in  the  Hardware  Business,"  Bul- 
letin of  the  National  Association  of  Credit  Men,  September,  1919, 
p.  835. 


44     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

premium  for  pre-payment  of  invoices  (and  thus  shortening  terms) 
is  far  more  common  among  them  than  among  the  machine  tool 
manufacturers. 

An  interesting  corollary  of  this  general  question  is  seen 
in  connection  with  the  decision  of  a  clothing  manufacturer, 
several  years  ago,  to  largely  increase  his  output  on  the  same 
capital,  and  the  consequent  necessity  of  turning  his  capital 
much  oftener  which  he  was  under.  This  he  did  by  abolish- 
ing the  season  dating  which  he  had  formerly  granted,  thus 
shortening  his  terms  correspondingly. 

Trade-Marked  Goods. — The  manufacturer  of  widely  ad- 
vertised and  popular  brands  of  goods  often  occupies  a 
peculiarly  strategic  position  with  respect  to  those  to  whom 
he  sells.  He  has  created  a  large  demand  for  his  goods,  and 
the  buyer  must  purchase  them  in  order  to  meet  the  con- 
sumers' demand.  Thus  the  manufacturer  is  enabled  to 
dictate  the  terms.  In  certain  lines  where  the  bulk  of  the 
products  are  widely  advertised  articles,  the  general  terms 
will  reflect  this  situation,  while  in  industries  where  widely 
advertised  articles  do  not  predominate,  the  manufacturer 
of  particular  brands  is  enabled  to  make  his  own  terms 
irrespective  of  those  employed  in  the  industry  as  a  whole. 
Manufacturers  who  are  thus  strategically  situated  tend  to 
shorten  their  terms,  although  the  extent  to  which  this  may 
be  done  depends  of  course  upon  the  strength,  or,  in  tech- 
nical economic  language,  the  inelasticity,  of  the  demand  for 
their  products.  It  should  be  borne  in  mind,  however,  that 
such  goods  also  move  quickly  tlu'ough  the  buyer's  hands, 
and  his  marketing  period  is  thus  shortened, 

A  good  illustration  of  such  terms  is  afforded  by  the 
tobacco  industry.  **  Probably  99  per  cent  of  all  tobacco 
products  other  than  cigars,  if  not  fully  100  per  cent, ' '  states 
a  leading  authority,  "are  sold  under  well-established  and 
popular  trade  marks,  while  in  cigars  the  case  is  quite  differ- 
ent."    There  are  a  number  of  well-established  brands  of 


LENGTH  OF  NET  TERMS  45 

cigars  which  are  sold  upon  the  same  standard  terms  as  are 
the  other  tobacco  products,  namely  2  per  cent  10  days  to 
30  days.  The  remainder  of  the  cigar  business  is  conducted 
in  considerable  part  by  small  manufacturers.  Sharp  com- 
petition prevails  and  terms,  which  have  quite  a  bearing  in 
making  sales,  are  longer  and  far  less  standardized.  Manu- 
facturers' terms  to  jobbers  vary  from  net  10  days  to  net 
30  days,  with  a  cash  discount  of  from  1  to  2  per  cent  in 
certain  cases,  while  jobbers'  terms  to  retailers  are  generally 
longer.  Standardization  of  terms  on  the  manufactured 
products  tends  to  be  aided  by  the  relative  degree  of  con- 
centration existing  in  the  industry. 

Regulaiity  of  Eelationship  between  Buyer  and  Seller. 
— Another  important  aspect  in  connection  with  the  general 
competitive  conditions  existing  in  any  given  industry  is 
the  degree  of  regularity  found  in  the  relationship  between 
buyers  and  sellers.  Where  there  is  a  regular  and  continu- 
ing relationship,  such  as  between  wholesaler  and  retailer, 
a  basis  is  afforded  for  the  extension  of  time,  with  the  buyer 's 
marketing  period  as  an  upper  limit.  On  the  other  hand, 
when  each  purchase  or  sale  is  separate  and  isolated,  no 
oversight  of  buyers'  operations  by  the  seller  exists.  This  is 
especially  the  case  in  what  may  be  termed  open-market 
trading.  Moreover,  in  this  case  either  buyer  or  seller — 
perhaps  both — in  any  transaction  will  be  a  speculative  or 
trading  jobber  of  the  kind  described  at  the  close  of  the 
previous  chapter.  Such  a  jobber  forms  no  regular  connect- 
ing link  between  manufacturer  and  retailer,  and  he  has  no 
regular  marketing  period.  Furthermore,  he  himself  is  not 
interested  in  the  business  of  those  who  purchase  from  him, 
and  does  not  perform  the  regular  wholesaler 's  credit  func- 
tion. His  terms  therefore  tend  to  be  short,  although  they 
often  are  adapted  largely  to  the  needs  of  the  individual 
case.    In  consequence,  too,  they  often  vary  considerably. 

Jobbers  of  this  kind  dealing  in  men's  wear  woolens  and 


46      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

worsteds  frequently  sell  on  terms  of  net  30  days,  although 
spot  cash  or  net  10  days,  net  60  days,  and  net  4  months 
are  also  given.  Regular  jobbers'  terms  are  7  per  cent  10 
days,  6  per  cent  30  days,  5  per  cent  60  days,  net  4  months, 
with  extra  dating  of  about  60  days.  Again,  in  copper  and 
zinc  a  considerable  speculative  jobbing  interest  exists,  and 
is  sufficient  to  affect  seriously  the  general  terms  employed 
by  the  producers.  Strictly  speaking,  for  these  metals  there 
are  no  "regular"  terms.  Sales  in  both  cases,  woolens  and 
metals,  are  largely  spot,  as  distinguished  from  contract 
sales.  Spot  sales  of  anthracite  are  often  made  for  cash,  and 
a  slightly  lesser  price,  such  as  5  cents  per  ton,  is  quoted, 
although  these  sales  usually  bear  the  same  terms  as  contract 
sales,  namely  the  15th  proximo.  AVhile  this  is  the  situation 
in  the  wholesale  market,  it  has  been  said  that  credit  is  often 
extended  by  wholesalers  to  retailers,  and  that  practical  and 
exclusive  connections  are  made  when  the  retailer  is  carried 
in  this  way.^ 

The  open  markets  in  each  of  these  industries  are  unor- 
ganized. The  general  principle,  however,  applies  also  to 
those  markets  which  are  organized,  and  which  are  found 
especially  in  connection  with  agricultural  products.  While 
such  markets  differ  in  degree  of  organization,  they  usually 
have  rules  governing  the  trading,  which  generally  cover  a 
variety  of  other  matters  as  well  as  incidentally  the  question 
of  terms.  In  such  markets  the  absence  of  a  regular  rela- 
tion between  buyer  and  seller  and  perhaps  also  of  a  regular 
marketing  period  for  the  buyer  is  even  more  complete  than 
in  the  case  of  the  unorganized  markets.  Terms  are  there- 
fore cash.  The  packer  or  the  feeder  who  purchases  cattle 
at  the  stockyards  pays  cash  to  the  commission  firm  to  whom 
the  stockman  has  forwarded  his  cattle.  Thus,  too,  the 
southern  tobacco  grower  receives  cash  from  the  leaf  sales 

"  Report  of  the  Federal  Trade  Commission  on  Anthracite  and 
Bituminous  Coal,  June  20,   1917. 


LENGTH  OF  NET  TERMS  47 

warehouseman  who  has  auctioned  off  his  tobacco,  and  re- 
ceives it  on  the  day  the  tobacco  is  sold,  the  warehouseman 
in  most  cases  collecting  the  following  day  from  the  buyer. 
Finally,  a  similar  situation  exists  in  the  case  of  the  grain 
exchanges,  and  the  rules  of  the  Chicago  Board  of  Trade, 
for  example,  call  for  cash  on  day  of  delivery. 

Business  Character  of  Each. — Lastly,  the  business  char- 
acter of  both  buyer  and  seller  must  be  considered.  By  this 
is  meant  the  extent  to  which  business  customs  are  observed, 
irrespective  of  whether  the  deviation  is  due  to  the  absence 
of  a  business  habit  of  thought,  as  on  the  part  of  the  house- 
wife, or  to  an  overdeveloped  desire  for  trading  in  the 
popular  sense  of  the  term,  as  is  often  the  case  with  small 
weak  firms.  This  factor  has  an  effect  in  a  variety  of  direc- 
tions. It  affects  the  degree  of  standardization  of  terms  in 
the  industry,  as  well  as  the  actual  length  of  the  terms 
specified  and  extent  to  which  they  are  observed.  It  is 
closely  related  to  the  degree  of  competition  existing,  which 
was  discussed  above,  and  its  influence  is  seen  in  some  of 
the  illustrations  given  in  that  connection.  The  consumer 
affords  the  most  conspicuous  case  where  business  character 
is  absent  in  ordinary  operations,  while  in  the  business  field, 
there  may  be  cited  the  trading  jobber  who  arose  in  the 
textile  industry  during  the  war  and  the  small  manufac- 
turer in  the  garment  trades.  In  industries  where  this  is  the 
case,  the  standard  of  business  moralit}'  is  generally  low. 

General  Illustrations. — In  the  first  part  of  the  preceding 
chapter  it  was  assumed  that  the  terms  generally  equal  the 
buyer's  marketing  period,  and  that  the  seller  thus  carries 
the  buyer  for  that  length  of  time.  In  the  second  part  it 
was  seen  that  where  merchandise  passes  through  two  hands 
before  reaching  the  buyer,  either  may  carry  it,  or  both  may 
cooperate  in  the  carrying  process.  The  extent  to  which 
each  participates  is  determined  by  the  general  competitive 


48      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

conditions  existing,  which  have  been  discussed  in  the  pres- 
ent chapter.  These  conditions  in  certain  cases  may  make 
the  length  of  the  terms  employed  in  a  given  industry 
materially  shorter  than  the  buyer's  marketing  period.  In 
other  words,  in  addition  to  the  class  of  terms  where  the 
seller  carries  the  buyer  and  thus  the  article  in  question, 
there  is  another  class  in  which  the  buyer  instead  carries  the 
article,  due  to  the  general  competitive  conditions  which 
exist,  and  a  third  in  which  the  task  of  carrying  is  divided 
between  buyer  and  seller.  The  buyer's  marketing  period, 
therefore,  frequently  affords  an  upper  limit  to  the  length 
of  the  terms,  instead  of  serving  as  an  absolute  regulator 
of  them.  Two  outstanding  examples  of  cases  where  the 
seller  does  not  do  the  entire  carrying  are  afforded  by  terms 
on  agricultural  produce,  and  terms  on  sales  by  manufac- 
turers to  wholesalers.  In  both,  several  of  the  forces  con- 
sidered under  the  head  of  general  competitive  conditions 
are  at  work,  and  together  operate  to  influence  the  terms 
employed. 

As  already  indicated,  the  farmer  generally  receives  cash 
for  his  produce.  This  is  due  chiefly  to  his  lack  of  economic 
strength  as  compared  with  the  buyer  of  his  products,  both 
as  to  size  and  capital  position,  and  to  the  fact  that  he  may 
be  said  to  have  already  "carried"  the  product  while  mak- 
ing the  crop.  Moreover,  no  regular  relationship  exists 
between  him  and  the  buyer,  so  that  this  feature,  which  is 
of  great  importance  where  credit  is  granted,  is  absent. 
Finally,  farming,  as  it  is  at  present  conducted,  may  on  the 
whole  be  said  to  have  little  business  character.  In  conse- 
quence, therefore,  the  buyer's  marketing  period  does  not 
operate  as  a  regulator  of  terms  in  the  agricultural  field, 
but  is  confined  solely  to  the  industrial  and  commercial 
fields. 

The  regular  wholesaler's  credit  function  was  indicated 
in  the  preceding  chapter.     As  was  pointed  out  there,  the 


LENGTH  OF  NET  TERMS  49 

position  which  he  occupies  in  the  marketing  process  prac- 
tically carries  this  credit  function  with  it,  and  the  terms 
which  he  receives  from  the  manufacturer  are  further  influ- 
enced by  the  disproportion  in  size  and  capital  position 
which  frequently  exists  between  him  and  the  manufac- 
turer. The  same  factor  operates  in  a  somewhat  different 
manner  in  the  case  of  dealers  or  producers  of  articles, 
whether  absolutely  raw  or  merely  semi-finished,  which  serve 
as  raw  material  for  manufacturers.  As  has  already  been 
seen,  such  products  are  generally  sold  for  cash,  since  in 
last  analysis  they  may  be  regarded  as  perishable,  and  in 
certain  cases,  at  least,  are  destined  for  current  as  con- 
trasted with  seasonal  use.  In  addition,  the  purchasing 
manufacturer  usually  is  in  a  strong  financial  position — 
stronger,  perhaps,  than  that  of  the  seller.  The  seller  of 
these  products,  whether  dealer  or  manufacturer,  therefore 
generally  has  no  regular  credit  function,  and  the  dealer 
partakes  largely  of  the  nature  of  a  trader,  operating  in  the 
open  market  in  the  industry  in  question. 

Both  packer  and  country  hides  are  generally  sold  both 
by  packers  and  dealers  on  terms  of  sight  draft  against  bill 
of  lading,  although  in  a  few  cases  longer  terms  are  granted, 
but  the  price  is  correspondingly  increased.  These  terms, 
however,  may  be  due  to  some  extent  to  the  position  occupied 
by  the  large  packers.  Similarly,  tanners'  terms  to  shoe 
manufacturers  are  short,  as  the  latter  usually  are  in  a 
strong  financial  position.  Regular  terms  on  sole  leather 
are  4  per  cent  10  days,  3  per  cent  30  days,  2  per  cent  60 
days,  net  90  days,  and  on  upper  leather  are  5  per  cent  10 
days,  4  per  cent  30  days.  In  both  cases,  monthly  settlement 
is  frequent. 

On  the  other  hand,  the  seller  may  extend  credit  in  cases 
where  it  is  needed  by  the  purchasing  manufacturer.  A 
good  illustration  is  afforded  by  the  leaf  tobacco  industry. 
Dealers '  terms  are  largely  adapted  to  the  needs  of  the  indi- 


50     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

vidual  purchaser.  Strong  manufacturers  may  pay  weekly 
as  a  statement  is  rendered  of  purchases  made  for  them  by 
the  dealer,  while  the  terms  to  them  will  be  short  in  the 
event  of  sales  from  the  dealer's  stock.  But  smaller  and 
weaker  manufacturers,  assuming  that  they  are  in  good 
standing,  will  receive  additional  time.  Four  and  6  months 
are  often  granted,  in  many  cases  with  note  or  trade  accept- 
ance, or  a  statement  may  even  be  rendered  at  the  close  of 
the  season  for  the  season's  purchases,  and  the  dealer  may 
charge  interest  for  the  time  taken. 

Mutual  Interrelation  of  Terms. — The  terms  on  any  one 
product  are  not  determined  entirely  independent  of  the 
terms  on  other  products.  On  the  contrary,  these  are  also 
taken  into  account,  and  when  two  products  are  related,  the 
terms  on  one  may  even  exercise  a  determining  influence 
upon  the  terms  which  the  other  shall  bear.  The  influence 
manifests  itself  in  a  variety  of  ways. 

1.  A  manufacturer  or  dealer  who  handles  two  separate 
products  frequently  applies  the  same  terms  to  both.  Paints 
and  varnishes  are  often  produced  by  the  same  manufac- 
turer, and  they  are  distributed  largely  through  the  same 
jobbers,  while  a  close  relation  exists  between  their  use. 
Especially  has  this  been  the  case  since  about  5  years  ago, 
when  paint  manufacturers  added  varnish  plants,  while 
conversely  many  varnish  manufacturers  commenced  to 
manufacture  paint.  Varnish  terans,  therefore,  tend  to  con- 
form to  those  on  paint,  and  the  regular  terms  on  both  are 
now  2  per  cent  10  days,  net  60  days,  the  varnish  terms 
having  been  changed  about  5  years  ago  from  5  per  cent  30 
days,  net  4  months.  A  similar  explanation  applies  to 
terms  in  the  optical  industry,  where  wholesalers  generally 
continue  to  quote  terms  of  6  per  cent  10  days  e.  o.  m.  (due 
10th  of  following  month).  This  is  said  to  be  "a  relic  of 
the  days  when  the  optical  business  was  closely  affiliated 
with  the  jewelry  trade,"  although  the  two  lines  are  now 


LENGTH  OF  NET  TERMS  51 

quite  distinct  and  affiliated  only  in  rare  cases.  Other 
illustrations  are  afforded  by  the  application  of  manufac- 
turers' terms  on  carpets  and  rugs  to  linoleum  also,  as 
well  as  by  the  use  of  the  regular  sole  leather  terms  of  5 
per  cent  10  days,  4  per  cent  30  days  on  purchases  by 
fancy  goods  manufacturers  from  tanners  producing  chiefly 
sole  leather,  in  place  of  the  customary  fancy  leather  terms 
of  2  per  cent  10  days,  net  30  days  or  2  per  cent  30 
days. 

2.  Where  several  articles  are  purchased  by  the  buyer, 
the  major  product  fixes  the  terms,  and  the  minor  products 
are  governed  accordingly.  This  is  the  case,  for  example, 
with  woolens  and  tailors'  trimmings.  In  this  instance, 
furthermore,  as  in  several  of  the  preceding  illustrations, 
the  buyer 's  marketing  period  for  the  two  articles  is  similar, 
and  both  are  handled  in  the  same  manner. 

3.  During  recent  years  wholesalers  in  leading  lines  have 
undertaken  in  an  increasing  degree  to  handle  also  other 
more  or  less  related  products,  and  this  has  created  certain 
problems  as  to  terms.  Hardware  wholesalers  now  sell  auto- 
mobile accessories  on  the  regular  hardware  terms  of  2  per 
cent  10  days,  net  60  days,  in  place  of  the  terms  granted  by 
regular  accessory  dealers  of  2  per  cent  10  days,  net  30 
days.  This  is  done  by  hardware  wholesalers  in  the  interest 
of  uniform  terms  on  all  the  products  they  handle.  It  is 
not  possible  in  all  cases,  however,  to  achieve  this  object, 
especially  where  the  terms  would  be  shortened  or  discounts 
decreased,  or  where  the  bulk  of  the  product  is  handled 
through  other  channels.  Moreover,  in  adding  related  lines, 
the  wholesaler  comes  to  handle  certain  goods  which  are 
distributed  only  to  a  small  extent  through  his  own  trade. 
He  therefore  must  reach  out  to  sell  these  items  to  retailers 
other  than  those  to  whom  he  has  previously  catered  regu- 
larly. The  wholesale  druggist  has  faced  these  problems 
and  has  devoted  much  attention  to  them.     For  example, 


52     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

jobbers  of  stationery  and  school  supplies  frequently  carry 
goods  which  may  be  classed  as  druggists'  sundries,  so  that 
the  wholesale  druggist  has  undertaken  to  induce  the 
stationery  wholesaler  to  employ  the  regular  drug  terms  of 
1  per  cent  10  days,  net  30  days.  These  efforts  have  met 
with  some  success,  and  in  1916  it  was  stated  that  many  lead- 
ing stationery  houses  had  reduced  their  cash  discount  from 
5  or  6  per  cent  to  2  per  cent,  net  terms  at  that  time  being 
60  days.  The  success,  however,  is  by  no  means  complete, 
and  the  regular  stationery  terms  at  present  are  still  differ- 
ent from  the  drug  terms. 

4.  Finally  the  interrelation  of  terms  may  be  based  upon 
geographic  considerations.  The  Montana  and  North 
Dakota  Wholesale  Grocers'  Associations  have  always  been 
governed  in  preparing  their  recommended  terms  by  the 
terms  of  the  Minnesota  Wholesale  Grocers'  Association,  due 
to  the  fact  that  the  large  Minneapolis  houses  sell  throughout 
their  territory,  and  to  the  fact  that  there  are  no  large 
independent  markets  in  these  two  states.  On  the  other 
hand,  however,  the  Minnesota  Wholesale  Grocers'  Associa- 
tion has  always  been  largely  influenced  by  the  terms 
employed  in  the  territory  to  the  east  of  it. 

Terms  of  the  Individual  House. — In  the  above  discussion 
attention  has  been  directed  chiefly  to  the  regular  terms 
which  exist  in  the  various  industries.  The  terms  of  the 
individual  house  in  any  particular  case  may  differ  from 
these  terms  to  a  greater  or  lesser  extent.  Whether  the 
seller  as  a  general  rule  deviates  from  these  terms,  depends 
upon  the  particular  situation  in  which  he  finds  himself. 
The  factors  to  be  considered  are  similar  to  those  discussed 
under  the  head  of  general  competitive  conditions.  It  has 
already  been  noted  that  a  manufacturer  of  well-known 
trade-marked  goods  may  in  large  measure  dictate  his  own 
terms,  while,  on  the  other  hand,  a  small  weak  seller  whose 
capital  is  insufficient  to  enable  him  to  extend  the  regular 


LENGTH  OF  NET  TERMS  33 

terms,  may  offer  a  special  concession  in  the  way  of  a  dis- 
count in  order  to  insure  prompt  payment. 

Differentiation  may  also  be  made  by  the  seller  in  the  case 
of  individual  buyers.  Additional  time  may  be  granted  a 
small  buyer  worthy  of  credit,  although  the  regular  terms 
call  for  shorter  time.  On  the  other  hand,  the  poor  credit 
risk  may  be  required  to  pay  before  he  receives  the  mer- 
chandise. This  may  be  done  either  by  requiring  cash  with 
order,  or  when  he  receives  the  merchandise,  through  the 
use  of  C.O.D.  or  sight  draft  terms.  In  lines  where  what 
may  be  designated  as  "graded  terms"  are  employed,  such 
as  8  per  cent  10  days,  7  per  cent  30  days,  6  per  cent  60  days 
(the  recommended  terms  of  the  New  York  City  Garment 
Conference  Council  of  Wliolesalers  and  Retailers),  a  poorer 
credit  risk  may  be  quoted  only  the  first  two  terms  and  thus 
receive  not  longer  than  30  days,  while  a  better  risk  may 
have  the  amount  of  his  purchases  on  the  regular  terms 
limited.  A  woolen  manufacturer,  for  example,  may  thus 
fix  a  line  of  credit,  indicating  the  amount  which  the  buyer 
may  purchase  on  the  regular  terms  of  7  per  cent  4  months, 
and  require  him  to  pay  cash,  through  10  per  cent  10  day 
terms,  for  any  additional  purchases  he  may  wish  to  make. 

How  the  Net  Period  is  Covered. — The  usual  method  of 
selling  goods  is  on  open  account.  That  is  to  say,  the  seller 
keeps  the  record,  and  sends  the  buyer  a  statement  of 
amounts  due.  In  technical  economic  language,  the  credit 
is  unembodied.  But  certain  exceptions  are  found  where 
credit  becomes  embodied.  These  ttnay  conveniently  be 
grouped  into  three  classes. 

1.  In  certain  staple  lines  a  sight  or  arrival  draft  is  regu- 
larly employed.  Carload  shipments  of  flour  are  usually 
made  (except  in  Texas  and  intermountain  territory) 
against  arrival  draft,  with  order  bill  of  lading  attached, 
while  canners  generally  sell  at  present  on  terms  of  2  per 
cent  for  payment  of  sight  draft,  1  1/2  per  cent  for  payment 


54      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

on  arrival  or  within  3  days  thereafter  or  within  10  days 
from  date  of  invoice,  and  net  terms  of  60  days.  Similarly 
producers  of  copper,  lead  and  zinc  often  use  a  sight  or 
arrival  draft  or  10,  20,  or  30-day  draft,  while  manufacturers 
of  automobiles  generally  use  a  sight  draft  with  bill  of 
lading  attached  in  the  case  of  cars  which  they  ship  to 
dealers. 

DigTessing  for  a  moment,  it  may  be  observed  here  that 
cash  in  effect  is  required  where  a  sight  or  arrival  draft  is 
employed,  the  terms  in  the  latter  case  covering  the  period 
required  for  transportation  of  the  merchandise  from  seller 
to  buyer.  In  some  industries,  such  as  copper,  lead  and  zinc, 
an  effort  has  been  definitely  made  by  certain  sellers  to 
adjust  the  terms  to  the  time  required  for  delivery.  Thus  10 
days  from  date  of  shipment  has  been  given  if  made  from 
an  eastern  refinery  and  30  days  if  made  from  a  western 
refinery.  Terms  of  this  kind  at  the  same  time  avoid  dis- 
putes as  to  what  constitutes  time  of  arrival,  which  are 
frequent  where  terms  calling  for  payment  upon  arrival 
are  employed.  The  purchaser,  however,  often  favors  ar- 
rival terms,  while  tie  seller  opposes  them.  An  example  of 
this  is  seen  in  the  lumber  industry,  where  wholesalers  have 
strongly  opposed  the  efforts  of  the  retailers'  associations, 
especially  those  in  the  metropolitan  district,  to  establish 
terms  based  upon  date  of  arrival. 

2.  Exception  is  made  in  the  case  of  lines  where  terms 
are  rather  long  and  buyers  in  general  are  small  and  of 
poorer  standing.  In  such  cases  a  promissory  note  is  used. 
This  is  often  done  in  the  jewelry  industry  in  cases  where 
season  settlements  or  net  terms  of  4  months  are  permitted ; 
in  the  tobacco  industry  on  sales  of  leaf  by  dealers  to  smaller 
manufacturers  on  extended  time;  and  in  the  case  of  the 
wholesale  lumber  industry.  The  recommended  terms  of 
the  National  Wholesale  Lumber  Dealers'  Association  pro- 
vide for  the  use  of  either  trade  acceptance  or  note  where 


LENGTH  OF  NET  TERMS  55 

the  net  terms  of  60  days  from  date  of  invoice  are  used. 
Acceptances  are  also  frequent  in  the  tobacco  industry  in 
place  of  notes,  and  in  both  these  industries  have  been  used 
for  some  years  past. 

3.  Acceptances  have  been  largely  employed  in  recent 
years  in  several  industries  in  connection  with  season 
datings.  While  rubber  manufacturers  regularly  sell  auto- 
mobile tires  on  open  account  for  monthly  payment,  on 
winter  shipments  bearing  a  specified  spring  due  date,  such 
as  part  April  10,  part  May  10,  and  the  remainder  June  10, 
the  trade  acceptance  is  generally  employed.  Again,  the 
recommended  terms  of  the  Wall  Paper  Manufacturers' 
Association  provide  for  the  use  of  a  trade  acceptance  due 
90  days  from  date  of  invoice,  in  the  event  that  cash  is  not 
paid  by  the  10th  proximo.  Finally,  in  the  agricultural 
implement  industry,  while  manufacturers  formerly  took  the 
note  of  the  farmer,  more  recently,  .with  the  change  from  a 
commission  to  a  sale  basis,  they  have  taken  instead  the  note 
or  acceptance  of  the  dealer. 

4.  Exception  is  made  in  the  case  of  terms  employed  on 
fixed  capital  goods  sold  to  buyers  who  are  unable  to  pay 
cash.  Instances  of  such  terms  were  given  in  the  previous 
chapter,  where  it  was  seen  that  the  general  practice  is  to 
employ  notes,  as  well  as  either  to  retain  title  to  the  ma- 
chinery or  other  goods  or  to  use  a  chattel  mortgage. 


CHAPTER  ly 

DATINGS 

It  is  difficult  to  give  a  precise  definition  of  datings,  for 
the  reason  that  in  last  analysis  they  are  of  several  kinds. 
Their  one  point  of  similarity  is  the  fact  that  they  all  serve 
to  defer  the  due  date  of  the  bill.  They  provide  for  an 
additional  period  over  and  above  that  which  would  other- 
wise be  granted  by  the  regular  terms,  usually  by  indicating, 
as  Mr.  William  A.  Prendergast  says,  that  "the  term  of  the 
credit  does  not  begin  to  date  until  the  expiration  of  the 
term  of  the  dating. ' '  ^  But  the  dating  may  be  expressed 
in  several  ways ;  it  may  be  for  a  greater  or  lesser  period  of 
time;  and  it  may  be  given  for  one  of  several  reasons.  In 
consequence  there  are  several  different  tjnpes  of  .datings. 
Specifically,  these  are  (1)  season  datings;  (2)  indirect 
datings;  (3)  datings  on  shipments  to  distant  territories; 
and  (4)  competitive  or  extra  datings. 

Season  Datings. — The  season  dating  provides  a  given 
date  from  which  commences  the  term  of  the  credit.  Thus 
wholesalers  of  dry  goods  generally  grant  on  season  pur- 
chases datings  of  April  1  or  May  1  in  the  spring,  and 
October  1  or  November  1  in  the  fall.  From  these  dates 
terms  of  2  per  cent  10  days  commence,  making  such  bills 
due  April  10  or  May  10  in  the  spring,  and  October  10  or 
November  10  in  the  fall.  By  season  purchases  are  meant 
purchases  of  goods  to  provide  the  stock  which  is  to  be 
worked  off  by  the  buyer  during  the  selling  season  which 

"^  Credit  and  Its  Uses  (New  York,  1906),  p.  114. 

66 


DATINQS  57 

follows.  As  has  been  seen  in  Chapter  II,  this  means  not 
only  that  the  goods  are  both  purchased  and  manufactured 
prior  to  the  buyer 's  active  selling  season,  but  also  that  they 
are  actually  delivered  in  advance  of  the  season,  and  that 
the  dealer  then  keeps  them  in  stock  until  the  season  opens. 
The  dry  goods  terms  indicated  above,  therefore,  generally 
apply  only  on  shipments  made  prior  to  2  months  before 
the  time  of  dating  (February  1  in  the  ease  of  an  April  1 
dating),  after  which  the  regular  terms  apply.  Thus,  also, 
because  cloak  and  suit  manufacturers  in  the  Cleveland  mar- 
ket receive  heavy  orders  in  advance  of  the  season,  while  in 
New  York,  goods  are  ordered  rather  for  delivery  as  needed, 
no  datings  are  given  in  New  York,  while  many  houses  in 
Cleveland  give  season  datings  of  March  1  and  September  1. 

By  means  of  the  dating,  account  is  taken  of  the  buyer's 
marketing  period,  and  due  recognition  is  given  in  highly 
seasonal  industries  to  the  periods  of 'the  year  when  his 
sales  are  made.  The  dating,  therefore,  represents  an  appli- 
cation of  the  principle  of  the  buyer's  marketing  period  as 
a  basis  for  terms  to  the  case  of  seasonal  industries.  This 
refers  only  to  those  industries  where  datings  apply  to  the 
stock  order,  and  not  to  industries  where  the  datings  apply 
only  to  sample  goods,  such  as  on  sales  of  woolens  and 
worsteds  by  manufacturers.  Where  a  dating  is  used,  the 
manufacturer  is  therefore  also  relieved  of  the  necessity  of 
taking  the  risk  of  producing  goods  which  he  cannot  sell; 
he  shifts  the  burden  of  gauging  market  demand  to  the 
buyer  instead. 

Advantages  to  the  Seller. — There  are  other  ad- 
vantages to  the  seller  through  producing  the  goods  in 
advance  of  the  season,  shipping  them  out  and  granting  a 
dating,  instead  of  producing  them  as,  or  retaining  them 
until,  the  buyer  needs  them.  These  advantages  have  been 
"well  stated  in  the  following  resolution  of  the  Paint  and 
Varnish  Credit  Club  in  1918 : 


58     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Whereas,  for  a  number  of  years  the  paint  and  varnish  manu- 
facturers have  offered  spring  datings  for  orders  placed  in  the  fall 
for  shipment  during  fall  and  winter  months,  and 

Whereas,  this  privilege  was  offered  for  two  reasons: 

First.  To  keep  the  plants  running  and  the  employees  on  full 
time  during  the  winter  months. 

Second.  To  avoid  congestion  in  the  plants  during  the  busy 
spring  months,  and 

Whereas,  This  very  liberal  attitude  of  the  manufacturers  has 
resulted  in  the  abuse  of  the  privilege  through  the  dealers  placing 
a  great  many  small  orders,  evidently  for  immediate  consumption, 
wath  the  expectancy  of  spring  datings ;  therefore  be  it 

Resolved,  That  this  practice  be  stopped  and  that  where  it  has 
been  customary  to  grant  spring  datings,  the  manufacturers  limit 
the  privilege  to  one  complete  stock  order,  to  be  shipped  at  the 
option  of  the  manufacturer  after  November  1. 

In  certain  seasonal  industries  it  is  absolutely  necessary 
that  the  goods  be  produced  in  advance  of  the  season,  but 
in  others,  the  manufacturer  is  given  the  option  of  length- 
ening the  period  within  which  he  actively  produces,  and 
thus  reducing  his  peak  load.  On  the  other  hand,  whether 
he  shall  ship  the  goods  out  and  grant  a  dating  or  shall 
retain  them  himself  until  needed  by  the  buyer,  is  entirely 
optional  with  him.  He  may  either  ship  them  out  at  once 
or  store  them,  as  he  sees  fit.  Thus,  orders  in  the  boot  and 
shoe  industry  are  taken  for  shipment  on  a  given  date,  but 
the  seller  retains  the  privilege  of  prior  shipment.  If  he 
ships  them  out,  he  bills  the  goods  on  the  date  called  for  in 
the  order,  in  place  of  the  date  of  shipment,  and  they  carry 
the  usual  terms,  without  dating.  In  reaching  a  decision 
as  to  which  of  these  two  methods  to  use,  a  manufacturer 
must  choose  between  the  necessity  of  providing  the  addi- 
tional warehouse  space  required  if  he  himself  stocks  the 
goods,  and  the  danger  involved  in  losing  control  over  them 
if  he  ships  them  out.  The  extent  of  the  danger  depends 
largely  upon  the  situation  of  the  buyer  with  respect  to  the 


DATINGS  59 

factors  discussed  in  the  preceding  chapter  under  the  head 
of  general  competitive  conditions.  Shipping  the  goods  out 
at  once  and  granting  a  dating,  also  has  the  advantage  of 
placing  them  in  the  dealer's  hands  at  the  earliest  moment, 
so  that  he  is  able  to  meet  at  once  any  demands  which  may 
arise.  In  some  cases  it  may  result  in  dealers  placing  orders 
in  advance  of  the  season,  instead  of  postponing  buying  until 
the  goods  are  actually  needed,  and  so  may  enable  the  man- 
ufacturer better  to  judge  the  demand. 

Illustrations. — Season  datings  are  found  in  many  lines. 
There  will  be  given  here  merely  some  examples  which 
illustrate,  on  the  one  hand,  how  closely  terms  may  be  ad- 
justed to  the  buyer's  marketing  period,  and  on  the  other 
hand,  the  relation  which  datings  bear  to  the  system  whereby 
the  article  is  marketed.  The  terms  recommended  by  the 
National  Implement  and  Vehicle  Association  undoubtedly 
represent  the  most  complex  structure  of  terms  in  exist- 
ence. Distinction  is  made  between  each  of  the  principal 
classes  of  agricultural  implements,  and  also  between  the 
different  sections  of  the  country.  The  country  is  divided 
into  4  zones — the  central  (which  provides  the  standard), 
and  the  northern,  southern  and  Texas.  The  time  granted 
differs  in  the  various  zones,  both  according  to  the  use  of 
the  implement  in  question  in  that  particular  zone  and  the 
time  when  crop  returns  are  received.  One  implement  may 
thus  be  classed  with  a  certain  group  in  the  central  zone, 
while  in  the  southern  zone  it  is  classed  with  another  group 
and  bears  a  different  dating,  according  to  the  special  con- 
ditions in  that  zone.  Another  illustration  is  afforded  by 
the  datings  employed  by  certain  manufacturers  in  the 
garment  industries.  Some  manufacturers  of  men 's  clothing 
grant  a  dating  of  November  1  on  suits  and  a  dating  of 
December  1  on  overcoats,  while  others  specify  May  1  on 
spring  goods  and  June  1  on  distinctly  summer  goods.  Cer- 
tain manufacturers  of  women's  cloaks  and  suits  grant  a 


60     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

dating  one  month  later  on  cloaks  than  the  usual  datings 
of  March  1  and  September  1,  which  they  give  on  suits. 

The  relation  which  datings  bear  to  the  marketing  system 
is  seen  especially  in  considering  changes  in  terms  over  a 
series  of  years.  As  a  result  of  the  shortening  of  manu- 
facturers' terms  on  agricultural  implements  in  recent  years 
(as  well  as  of  a  fear  of  possible  price  declines),  dealers 
are  now  said  not  to  place  as  large  initial  stock  orders  as 
formerly,  and  direct  shipments  from  factories  to  dealers 
have  decreased,  so  that  manufacturers  are  required  to 
carry  larger  stocks  at  distributing  points.  A  somewhat 
similar  experience  is  reported  by  sole  leather  tanners.  It 
has  been  stated  that  "about  10  years  ago,  terms  were  5 
per  cent  10  days,  4  per  cent  60  days,  with  almost  any  dating 
a  shrewd  buyer  would  exact  under  abnormal  market  con- 
ditions. As  the  shoe  manufacturing  trade  developed,  the 
tanner  became  more  and  more  both  manufacturer  and 
banker,  and  with  increasing  cost  of  hides,  bark,  etc.,  could 
no  longer  stand  the  strain."  Terms  were  therefore  finally 
changed  to  4  per  cent  10  days,  3  per  cent  30  days,  2  per 
cent  60  days,  net  90  days,  generally  with  either  20  days 
extra,  or  with  monthly  settlement.  Fixed  buying  periods 
are  said  by  one  tanner  to  have  been  largely  obliterated  since 
this  change.  Finally,  several  years  ago  a  southern  whole- 
saler of  dry  goods  stated  that  he  believed  a  change  in 
marketing  methods  was  occurring.  He  felt  that,  as  a  result 
of  the  improved  roads  which  were  being  built,  salesmen 
using  automobiles  would  be  able  to  call  on  their  trade  at 
least  once  every  60  days,  and  therefore  it  would  be  unnec- 
essary for  retailers  to  buy  season  bills  in  advance,  as  had 
been  the  custom.  As  a  result,  the  retailers  would  not  need 
long  time,  and  terms  would  become  2  per  cent  10  days,  net 
60  days  from  date  of  shipment. 

One-Season  Industries. — A  number  of  industries  have 
two  seasons  a  year — spring  and  fall — ^but  a  number  have 


DATINGS  61 

only  one  season,  either  fall  or  winter,  or  spring  or  sum- 
mer, depending  upon  the  particular  article  in  question. 
The  general  principles  which  govern  the  fixing  of  the 
dating  in  one-season  industries  are  substantially  similar 
to  those  found  in  the  case  of  two-season  industries.  Auto 
tires  have  already  been  cited.  A  spring  dating  is  given 
in  the  case  of  winter  shipments  of  them,  while  during  the 
season  the  regular  terms  are  5  per  cent  10th  proximo.  The 
dating  usually  applies  upon  shipments  from  November  1, 
December  1  or  January  1  to  March  1  or  April  1,  and  several 
forms  of  dating  are  employed,  April  1  (and  thus  due  date 
of  May  10)  being  most  common. 

The  wall  paper  industry  affords  another  good  example  of 
a  one-season  industry.  Invoices  of  wall  paper  manufac- 
turers rendered  between  September  1  and  February  1  carry 
the  latter  date,  except  in  the  case  of  invoices  covering  gooda 
shipped  on  duplicate  orders  for  fall  and  winter  require- 
ments of  goods  of  previous  years'  manufacture,  which  carry 
no  advance  dating.  The  object  of  the  February  1  dating  is 
said  to  be  to  induce  dealers  to  accept  goods  as  manufac- 
tured, and  before  they  are  actually  required,  so  that  the 
necessity  of  manufacturers  maintaining  extensive  ware- 
house space  is  obviated.  A  somewhat  similar  situation 
existed  in  the  straw-braid  hat  industry.  Before  the  war, 
manufacturers  booked  the  majority  of  orders  from  the 
early  part  of  July  to  the  early  part  of  October  for  the 
entire  season's  business,  running  from  July  to  July.  Ship- 
ments were  made  at  the  discretion  of  the  purchaser,  and  for 
many  years  terms  were  7  per  cent  10  days  May  1  to  the 
jobber  and  6  per  cent  10  days,  5  per  cent  30  days  June  1 
to  the  retailer.  The  bulk  of  shipments  were  made  during 
March  and  April,  necessitating  storage  by  the  manufac- 
turer until  that  time.  In  1917,  the  three  larger  Baltimore 
manufacturers  found  great  difficulty  in  making  their  ship- 
ments   at    the    customary    time,    due    to    the    prevailing 


62     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

transportation  conditions.  In  consequence,  for  the  year 
commencing  July,  1918,  manufacturers  with  few  exceptions 
decided  to  revise  their  methods,  and  to  require  that  pur- 
chasers take  the  goods  as  they  came  from  the  factory.  In 
order  to  encourage  early  purchase,  shipment  and  payment, 
terms  were  changed  to  10  per  cent  for  payment  on  or 
before  October  10,  1918,  and  a  graded  set  of  discounts, 
of  the  kind  described  more  fully  in  the  following  chapter, 
was  introduced.  The  discount  decreased  1  per  cent  per 
month  for  later  payment,  thus  making  the  lowest  discount 
2  per  cent  for  payment  after  May  10  and  before  June  10. 

Frequency  of  Purchases. — The  principles  just  discussed 
are  applicable  also  in  the  case  of  non-seasonal  industries. 
The  purchaser  may  stock  up  the  goods,  and  thus  place  large 
orders  at  less  frequent  intervals,  instead  of  placing  a  larger 
number  of  small  orders  as  he  needs  the  goods.  At  times  the 
seller  will  consciously  encourage  this.  One  manufacturer 
of  tissue  paper,  for  example,  desires  to  sell  carload  lots  to 
western  buyers  in  order  to  save  freight,  but  purchasers  in 
that  section  cannot  sell  the  article  as  readily  as  in  the  East, 
so  that  it  is  necessary  to  extend  them  30  days  longer,  in 
view  of  their  slower  turnover.  In  certain  cases,  too,  a 
buyer  in  an  industry  where  purchases  are  customarily  made 
for  current  use  only  may  instead  stock  the  article,  and 
receive  additional  time.  Thus  a  note  is  taken,  in  place  of 
the  regular  monthly  terms,  for  foundry  or  domestic  coke 
put  in  stock  for  future  use. 

The  entire  question  is  related  to  the  problem  of  the  nature 
of  the  article,  in  particular  whether  it  is  rather  for  seasonal 
or  for  current  use,  as  was  mentioned  in  Chapter  II.  Some 
foodstuffs,  for  example,  which  are  practically  non-perish- 
able, arc  bought,  as  a  rule,  in  larger  quantities  to  cover 
the  requirements  of  a  longer  period,  and  therefore  carry 
longer  terms  than  do  perishable  articles.  The  usual  terms 
on  fresh  meats  call  for  weekly  payment,  while  the  terms 


DATINGS  63 

on  canned  fruits  and  vegetables  call  for  2  per  cent  for  pay- 
ment of  sight  draft,  1  1/2  per  cent  for  payment  on  arrival 
or  within  3  days  thereafter  or  within  10  days  from  date 
of  invoice,  and  net  60  days.  But  purchasing  by  the  retailer 
in  larger  quantities  and  at  less  frequent  intervals  is  by  no 
means  universally  favored.  A  southern  wholesale  dry 
goods  house  has  said  that  '*we  are  encouraging  frequent 
orders  from  our  trade  either  weekly  or  at  least  semi- 
monthly, as  we  find  our  trade  is  more  apt  to  keep  their 
accounts  in  a  satisfactory  condition  in  this  way  than  when 
they  buy  2  or  3  bills  a  year,  which  necessitates  a  larger 
payment  at  one  time."  Similarly,  a  middle  western  whole- 
sale hardware  house  ascribes  the  efforts  on  the  part  of  the 
wholesaler  in  that  line  to  establish  uniform  terms  and 
'*what  appears  to  be  largely  2  per  cent  cash  discount 
within  10  days"  to  a  desire  ''to  educate  the  retail  trade  in 
the  necessity  of  discounting  their  bills  and  making  a  quick 
turnover  of  their  business;  in  other  words,  purchasing  in 
smaller  quantities,  paying  promptly,  etc." 

Indirect  Datings. — Looked  at  in  another  way,  in 
cases  where  the  seller  himself  retains  a  previously  manu- 
factured article  until  the  buyer  needs  it,  and  then  ships 
it  out,  the  buyer  may  be  said  indirectly  to  receive  a  dating. 
Buyers  have  recognized  this,  and  in  certain  cases  have  at- 
tempted to  postpone  the  date  of  shipment  in  order  to 
lengthen  the  terms.  The  smaller  manufacturers  of  knit 
underwear  are  said  to  buy  yarns  through  the  smaller  com- 
mission houses,  and  either  to  secure  longer  terms  or  to 
"string  out"  shipments  which,  it  is  commented,  "amounts 
to  the  same  thing."  Again,  in  the  millinery  braid  indus- 
try, buyers  adjusted  the  date  of  shipment  so  as  to  nullify 
an  attempted  change  in  terms.  When  manufacturers 
advised  purchasers  on  March  1,  1920,  that  the  former  sea- 
son datings  of  April  1  and  October  1  would  be  eliminated, 
the  customers  gave  instructions  to  ship  goods  on  January 


64     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

1,  making  due  dates  and  discounts  8  per  cent  February  10 
or  6  per  cent  April  10. 

On  the  other  hand,  sellers  happening  to  be  in  a  strategic 
position  have  attempted  to  shorten  terms  by  specifying  the 
date  of  shipment.  Wholesale  dry  goods  houses  during  the 
latter  part  of  the  war  period  definitely  limited  the  time  of 
shipment.  Merchandise  was  scarce  at  that  time  and  they 
were  able  to  force  acceptance  of  early  deliveries  by  buyers. 
One  wholesaler  included  in  the  1918  survey  of  members' 
terms  by  the  National  Wholesale  Dry  Goods  Association 
stated  that  "we  have  been  accepting  spring  business  for 
future  shipment  to  be  shipped  not  more  than  30  days  from 
date  that  the  order  is  taken/'  and  his  customary  terms  of 
2  per  cent  10  days,  1  per  cent  30  days,  net  60  days  then 
applied.  Another  wholesaler  stated  that  he  applied  the 
April  1  spring  dating  to  advance  orders  where  the  customer 
for  any  reason  wanted  shipments  held  until,  say,  March  1, 
as  well  as  to  shipments  made  at  the  usual  time  in  January. 

Shipments  to  Distant  Territories. — In  certain  cases, 
additional  time  will  be  given  in  the  case  of  shipments  to 
distant  territories.  This  is  especially  true  of  the  Pacific 
Coast,  where  the  additional  time  generally  amounts  to 
about  30  days,  as  well  as  to  some  extent  of  the  South.  The 
time  may  be  granted  either  by  specifying  a  definite  date, 
similar  to  a  season  dating,  by  granting  30  days  extra,  by 
increasing  the  length  of  the  regular  net  terms,  or  by  basing 
the  terms  upon  date  of  arrival  instead  of  date  of  shipment.^ 
Many  houses  grant  the  additional  time  only  for  taking  the 
discount,  and  the  net  period  is  measured  from  the  date  of 
shipment.^  Manufacturers  of  cutlery  grant  60  days  on 
Pacific  Coast  shipments  in  place  of  the  regular  30  days, 
and  some  producers  of  canned  soups  specify  1  1/2  or  2 

'Arrival  terms  are  at  times  designed  as  E.O.G.  (receipt  of  goods) 
terms. 

"Ettinger  &.Grolieb,  Credits  and  Collections  (New  York,  1917), 
p.  76. 


DATINGS  65 

per  cent  for  reinittauee  within  3  days  after  arrival,  net  30 
days.  By  these  means,  cognizance  is  taken  of  the  time 
required  for  the  transportation  of  the  goods,  and  the  pur- 
chaser receives  time  sufficient  to  cover  this  period  in 
addition  to  the  regular  net  terms  (based  upon  his  market- 
ing period)  which  prevail  in  other  sections. 

Competitive  or  Extra  Datings. — The  competitive  or 
extra  dating  specifies  a  certain  period  which  is  to  be 
granted  in  addition  to  that  which  would  otherwise  be 
granted  by  the  regular  terms.  Manufacturers  of  men's 
clothing,  for  example,  frequently  grant  7  per  cent  10  days, 
60  days  extra,  making  the  bill  due  in  70  days.  In  fact, 
where  a  dating  of  this  kind  is  granted,  the  due  date  so 
specified  represents  the  regular  terms,  and  the  dating  has 
become  an  integral  part  of  them.  The  dating,  however,  is 
frequently  expressed  only  in  the  case  of  the  discount  period, 
while  the  net  terms  are  quoted  in  the  regular  manner. 
Thus  the  regular  terms  of  wholesalers  of  dry  goods  are 
2  per  cent  10  days,  60  days  extra,  with  net  terms  in  many 
cases  of  90  days  or  4  months,  although  frequently  no  terms 
beyond  the  regular  70-day  period  are  formally  quoted. 

Prendergast*  traces  the  origin  of  datings  of  this  descrip- 
tion to  the  discontinuance  of  long  time,  such  as  4,  6  and  8 
months.  It  is  undoubtedly  true  that  it  is  in  industries 
where  the  time  given  is  fairly  long,  that  such  datings  are 
found,  and  the  datings  themselves  are  often  not  short. 
There  are  no  datings  of  10  days  extra ;  the  shortest  appear 
to  be  20  days  extra,  which  are  employed  by  sole  leather 
tanners  in  order  to  permit  monthly  payment,  and  most 
call  for  60  days  extra,  a  lesser  number  specifying  30  days 
extra.  Moreover,  such  datings  have  appeared  in  certain 
lines  where  there  has  been  a  movement  to  shorten  terms 
and  abolish  season  datings.  This  was  the  case,  for  example, 
with  manufacturers  of  carpets  and  rugs,   who  prior  to 

*P.  113. 


66     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

about  1916  generally  had  terms  of  4  per  cent  10  days,  with 
March  1  and  September  1  season  datings,  whereas  they  now 
mostly  have  terms  of  4  per  cent  10  days,  60  days  extra. 

But  the  general  character  of  the  industries  in  which  these 
datings  are  found  must  not  be  neglected.  In  many  of  them 
the  forces  considered  in  the  preceding  chapter  under  the 
head  of  general  competitive  conditions  bulk  large  in  decid- 
ing what  terms  shall  be  employed.  The  datings  which  are 
given  are  the  result,  in  part  at  least,  of  the  operation  of 
these  forces,  and  the  extra  time  granted  reflects  the  general 
competitive  conditions  which  prevail. 

On  the  other  hand,  to  some  extent  there  lies  back  of 
these  datings  an  effort  to  adapt  the  time  to  the  buyer's 
marketing  period.  Looked  at  from  the  buyer's  side,  this 
is  an  important  factor,  while  from  the  seller's  point  of 
view,  the  general  competitive  conditions  predominate. 
There  is  by  no  means  a  sharp  difference  in  use  between  the 
season  dating  and  the  competitive  or  extra  dating,  and 
both  may  be  employed  side  by  side  in  certain  industries, 
one  serving  as  a  counterpart  of  the  other.  Moreover,  in 
the  efforts  to  shorten  terms  to  which  reference  has  just 
been  made,  the  adoption  of  a  shorter  extra  dating  in  place 
of  the  former  season  dating,  instead  of  eliminating  entirely 
any  dating  whatsoever,  in  itself  may  be  considered  a  rec- 
ognition to  some  extent  of  the  need  for  adapting  the  time 
to  the  length  of  the  buyer's  marketing  period.  In  some 
other  industries  where  terms  have  been  shortened,  such  as 
the  manufacture  of  the  finer  men's  shirts,  the  former  extra 
dating  remains  on  season  orders  and  acts  in  place  of  a 
season  dating  in  supplying  the  additional  time  required  by 
the  buyer  on  such  purchases. 

Datings  not  Rigid. — Datings  have  been  considered 
above  as  determined  by  the  natural  forces  prevalent 
in  the  industry  in  question,  especially  the  buyer's  market- 
ing period  and  the  general  competitive  conditions.    But  this 


DATINGS  67 

by  no  means  implies  that  they  are  absolutely  rigid  and 
fixed.  Rather  are  they  flexible  and  subject  to  considerable 
change.  It  has  just  been  noted  that  in  recent  years  they 
have  been  either  decreased  or  in  extreme  cases  entirely 
abolished  in  industries  where  sellers  have  found  themselves 
in  a  strategic  situation.  There  has  also  been  a  marked 
change  in  the  seasonal  character  of  certain  industries,  and 
a  corresponding  effect  upon  datings.  The  fur  industry 
formerly  had  only  one  season,  but  in  recent  years  the 
fashion  for  summer  furs  has  given  the  industry  two  sea- 
sons, and  a  dating  of  July  1  is  now  found  in  addition  to 
the  December  1  or  January  1  dating  on  regular  goods. 
During  the  past  few  years  there  has  been  an  active  and 
well  defined  movement  on  foot,  sponsored  by  the  Millinery 
Chamber  of  Commerce  of  the  United  States,  looking 
towards  the  establishment  of  a  twelve  months'  business  for 
all  branches  of  the  millinery  industry,  with  a  resultant  sale 
of  seasonable  millinery  for  each  season  of  the  year.  This 
should  have  an  effect  upon  the  regular  datings  of  April  1 
and  October  1,  which  are  at  present  found. 

Grouping  of  Transactions. — Allied  to  datings,  and 
in  a  sense  itself  a  form  of  dating,  is  the  practice 
of  grouping  transactions  and  providing  a  single  settlement 
date  at  regular  intervals,  instead  of  a  succession  of  such 
dates,  one  for  each  individual  transaction.  The  single 
settlement  date  is  convenient  for  both  buyer  and  seller. 
Particularly  is  this  true  in  the  case  of  active  accounts, 
and  so  distinction  is  often  made  between  them  and  inactive 
accounts,  which  bear  the  regular  terms.  Similarly,  excep- 
tion is  often  made  in  the  case,  for  example,  of  sales  of 
foodstuffs  to  government  institutions  and  to  large  corpora- 
tions, including  railroad,  lumber  and  coal  companies  which 
operate  commissaries.  In  the  latter  case,  bills  are  fre- 
quently rendered  to  the  head  office  of  the  corporation, 
instead  of  to  the  office  receiving  the  purchases.    The  single 


68     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

settlement  date  is  often  named  in  connection  with  the  cash 
discount  period.  Monthly  settlement  of  active  accounts  is 
frequent,  instead  of  settlement  within  10  days,  as  in  the 
case  of  inactive  accounts  with  few  transactions.  Where  this 
is  done,  10th  proximo  or  10  days  e.  o.  m.  (end  of  month) 
will  be  specified,  payment  in  both  cases  then  being  required 
by  the  10th  of  the  following  month.  The  designation 
"proximo"  is  generally  used  in  industries  such  as  whole- 
sale groceries  and  auto  tires,  while  the  designation 
**e.  0.  m. "  is  generally  used  in  the  various  branches  of 
the  textile  industry.  The  10th  is  the  most  frequent  date, 
although  the  15th,  20th  and  25th  are  also  found.  On  the 
whole,  a  growing  tendency  towards  the  use  of  proximo 
terms  appears  to  be  reported  in  the  leading  wholesale  lines. 
Grouping  of  transactions  on  less  than  a  monthly  basis 
is  often  found.  Semi-monthly  terms  are  used  in  certain 
cases  on  sales  by  wholesalers  to  retailers,  such  as  in  some 
sections  in  the  confectionery  industry.  Similarly,  fresh 
meats  are  usually  sold  on  a  weekly  basis,  and  payment  is 
required  by  a  given  day  of  the  following  week.  In  both 
these  cases  collections  are  often  made  by  salesmen  when 
they  call  upon  the  trade.  This  provides  a  ready  collection 
medium  for  the  seller,  while  at  the  same  time  the  frequency 
of  the  salesman 's  visits,  and  thus  of  the  buyer 's  purchasing, 
reflects  the  latter 's  rate  of  turnover  and  therefore  corre- 
sponds to  his  marketing  period.  Similarly,  practically  all 
dealers  in  manufactured  tobacco  products  discount  their 
bills,  because,  except  in  the  rural  districts,  the  jobber 
usually  calls  on  the  retailer  not  less  than  once  a  week  and 
often  twice,  and  the  latter  thus  buys  his  supplies  from  week 
to  week.  In  fact,  no  cash  discount  is  granted  the  small 
trade,  but  they  are  quoted  instead  prices  on  a  net  cash 
basis,  with  the  discount  already  deducted. 


CHAPTER  V 

CASH  DISCOUNTS 

In  the  preceding  chapters  it  was  first  considered  that 
the  buyer  generally  receives  terms  equal  in  length  to  his 
own  marketing  period.  Subsequently  it  was  seen  that  this 
period  instead  forms  rather  an  upper  limit,  below  which 
the  terms  may  be  swayed  somewhat  by  the  general  com- 
petitive conditions  prevailing  in  the  industry  in  question. 
But  in  every  industry  certain  buyers  are  in  a  peculiarly 
favorable  position.  They  are  able  to  pay  cash  at  once, 
while  many  of  their  fellow  competitors  find  it  necessary  to 
take  time.  They  may  either  have  the  funds  themselves, 
or  else  may  obtain  them  from  their  banks,  but  in  any  event 
they  are  able  to  pay  the  seller  cash.  In  fact,  cash  payment 
or  discounting  of  bills  is  a  prime  test  of  credit  standing 
in  the  United  States  to-day.  In  this  way,  the  buyers  in  a 
given  industry  naturally  divide  themselves  into  two  great 
classes,  one  of  superior  and  one  of  lesser  credit  standing. 
This  is  true  of  most  industries,  but  in  some,  notably  the 
leading  wholesale  lines,  it  is  the  usual  practice  for  almost 
the  entire  body  of  buyers  to  discount  their  bills.  Such 
industries  therefore  must  be  distinguished  from  the  general 
rank  and  file. 

Cash  Discounts  and  Trade  Discounts. — Discounts  are  of 
two  kinds.  Goods,  for  example,  may  carry  a  trade  discount 
of  10  per  cent,  as  well  as  a  cash  discount  of  2  per  cent  for 
payment  within  10  days  instead  of  60  days.  On  the 
surface,  the  difference  between  the  two  classes  of  discounts 
appears  to  be  largely  one  of  size,  but  in  last  analysis  it 
goes  somewhat  deeper.     The  cash  discount  represents  a 

69 


70     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

deduction  from  the  face  amount  of  the  bill  of  goods  which 
is  to  be  paid  when  the  net  terms  are  taken.  The  net  terms 
supply  a  standard,  and  the  cash  discount  is  granted  in  view 
of  payment  at  an  earlier  specified  date.  The  trade  discount, 
on  the  other  hand,  is  granted  irrespective  of  the  time  of 
payment,  and  represents  a  price  adjustment,  granted  either 
to  all  buyers  or  to  certain  specially  selected  ones.  It  is 
immaterial  whether  goods  are  quoted  at  $90,  or  at  $100  less 
a  trade  discount  of  10  per  cent.  There  may  be  several 
such  trade  discounts,  each  deducted  successively  from  the 
face  of  the  bill  after  the  previous  one  has  been  deducted, 
but  this  is  never  the  case  Avith  the  cash  discount.  With  the 
latter,  one  discount  alone  is  quoted  for  payment  at  a  cer- 
tain time.  The  trade  discount,  even  where  only  a  single  one 
is  given,  is  generally  larger  than  the  cash  discount. 

The  distinction  should  not  be  confused  by  the  fact  that 
at  times  trade  discounts  have  become  stereotyped,  and  are 
in  general  use  in  a  given  industry,  so  that  they  have  been 
incorporated  into  and  become  an  integral  part  of  the  regu- 
lar structure  of  terms  in  that  industry.  This  is  particularly 
the  case  with  graded  discounts,  which  will  be  discussed 
later.  Manufacturers  sell  woolens  and  worsteds  largely 
upon  terms  of  10  per  cent  30  days,  8  per  cent  60  days  or 
90  days  and  7  per  cent  4  months.  The  terms  of  7  per 
cent  4  months  correspond  to  the  net  terms  usually  found 
in  other  industries  and  actually  represent  a  trade  discount. 
Each  of  the  other  discounts  contains  two  elements — a  trade 
discount  of  7  per  cent  and  a  cash  discount  equal  to  the 
difference  between  the  quoted  discount  and  the  trade  dis- 
count. Neither  should  the  distinction  be  confused  by  the 
fact  that  in  a  few  industries  a  trade  discount  may  be  in- 
corporated into  the  quoted  discount  if  the  purchaser  so 
desires.  Thus  the  New  York  City  Garment  Conference 
Council  of  Wholesalers  and  Retailers  in  July,  1917,  rec- 
ommended terms  of  8  per  cent  10  days,  7  per  cent  30  days, 


CASH  DISCOUNTS  71 

6  per  cent  60  days  or  so-called  "net"  terms  of  2  per  cent 
10  days,  1  per  cent  30  days,  net  60  days,  the  price  being 
advanced  correspondingly  in  the  former  case  to  compensate 
for  the  difference  in  the  discount. 

Where  the  quoted  discount  actually  includes  a  trade 
discount,  the  trade  discount  is  given  to  all  purchasers  alike. 
In  such  cases,  the  seller  merely  adds  it  to  his  other  expenses 
of  production  in  order  to  obtain  the  price  he  quotes  the 
buyer.  The  latter  then  in  turn  deducts  it  in  order  to 
arrive  at  the  actual  cost  of  the  goods  to  him.  It,  therefore, 
represents  merely  a  cumbersome  price  adjustment,  and 
does  not  serve  its  true  economic  purpose.  This  is  to  keep 
commodity  distribution  in  certain  regular  channels.  The 
manufacturer  generally  grants  the  wholesaler  a  larger 
trade  discount  than  he  gives  the  retailer,  or  else  grants  the 
retailer  none  at  all.  This  serves  to  provide  the  wholesaler 
with  a  minimum  margin  of  profit,  represented  by  the  dif- 
ference between  the  trade  discount  he  receives  and  that 
which  the  retailer  receives.  The  wholesaler  is  accordingly 
protected,  and  his  place  in  the  process  of  distributing  the 
article  in  question  is  recognized.  This  is  the  actual  function 
of  the  trade  discount.  It  has  no  direct  relation  whatsoever 
to  credit  matters. 

Nature  of  the  Cash  Discount. — Some  authorities  have  at- 
tempted a  more  rigid  definition  of  the  cash  discount.  They 
hold  that  fundamentally  it  is  a  premium  for  prompt  pay- 
ment, and  not  a  discount  in  lieu  of  time,  instead  of 
recognizing  both  elements,  as  we  have  done.  In  fact,  the 
National  Wholesale  Dry  Goods  Association  for  several  years 
termed  it  a  cash  premium,  and  not  a  cash  discount.  The 
view  has  been  expressed  elsewhere  as  follows:  "The  cash 
discount  is  a  premium  offered  by  the  seller  to  the  buyer 
for  anticipated  payment  of  a  bill  not  due."  ^    The  thought 

*  Proceedings,  National  Wholesale  Lumber  Dealers'  Association, 
1917,  p.  50. 


72      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

is  to  stress  the  fact  that  the  discount  has  as  its  purpose  to 
secure  prompt  payment,  instead  of  later  payment  at  the 
expiration  of  the  net  period.  As  such,  it  represents  a  con- 
cession by  the  seller,  and  the  period  within  which  payment 
is  required  should  be  observed.  Moreover,  in  order  to  se- 
cure prompt  payment,  the  discount  must  be  somewhat  in 
excess  of  the  current  rate  of  interest,  so  that  borrowing 
from  the  bank  in  order  to  take  the  discount  is  profitable. 
Where  net  terms  are  30  days,  a  cash  discount  of  1/2  per  cent 
10  days  is  not  effective,  but  a  cash  discount  of  1  per  cent  or 
2  per  cent  10  days  is. 

Furthermore,  the  maximum  size  of  the  cash  discount  is 
also  limited.  All  buyers  in  any  given  industry  are  not 
in  a  position  to  discount  their  bills,  and  in  some  lines  by 
far  the  larger  part  may  take  the  net  terms.  In  such  cases 
there  is  no  advantage  in  penalizing  the  buyer  who  cannot 
discount,  and,  at  the  same  time,  there  is  no  gain  in  favoring 
the  buyer  who  can.  Theoretically,  the  size  of  the  discount 
from  the  point  of  view  of  the  seller  who  is  amply  able  to 
borrow  from  his  own  banks  should  be  determined  by  the 
current  rate  of  interest  to  him,  plus  the  cost  of  credit 
work  on  and  handling  of  the  accounts  which  do  not  dis- 
count, plus  the  bad  debt  loss  experienced  on  such  accounts. 
In  any  event,  however,  the  size  of  the  cash  discount  and 
the  length  of  the  net  terms  are  closely  and  mutually  inter- 
related. Once  given  the  net  terms,  within  broad  limits 
the  cash  discount  is  determined,  and  vice  versa.  Each  is  an 
integral  part  of  the  terms  structure. 

Relation  to  Terms. — Opposed  to  the  view  which  has  just 
been  stated  is  the  opinion  held  by  some  writers  that  the 
cash  discount  and  the  terms  are  entirely  separate.  The 
first,  they  hold,  relates  to  a  discount;  the  second,  to  time. 
These  writers,  in  general,  believe  that  little  standardization 
of  terms  on  the  whole  exists,  and  that  the  casli  discount  can- 
not  be   dissociated    in    actual    practice    from    the   trade 


CASH  DISCOUNTS  73 

discount.  Those  who  hold  this  view  come  in  contact  largely 
with  those  industries  in  which  what  have  been  termed 
general  competitive  conditions  bulk  largest  in  determining 
terms,  and  in  which  there  is  thus  frequent  bargaining,  both 
as  to  length  of  net  terms  and  as  to  size  of  discount.  The 
size  of  the  discount,  they  hold,  becomes  rather  a  price  prob- 
lem. Instances  which  they  cite  in  support  of  this 
contention  include  cases,  for  example,  where  a  seller  who 
quoted  8  per  cent  10  days  granted  9  per  cent  for  spot  cash. 
They  also  refer  to  the  fact  that  terms  in  the  case  of  tea 
and  coffee  sales  by  importers  and  roasters  to  jobbers  and 
in  the  case  of  sales  by  trading  jobbers  in  the  textile  lines, 
often  vary  according  to  the  price  quoted. 

The  important  point  to  remember  in  connection  with 
such  illustrations  is  that  they  are  exceptions  to  the  usual 
order  of  things.  In  last  analysis,  the  cash  discount  and 
the  price  are  entirely  separate.  The  more  this  is  recognized, 
the  better  is  the  basis  on  which  industry  finds  itself.  The 
credit  problems  constitute  a  distinct  class,  and  should  be 
treated  separately.  This  is  recognized  by  those  associations 
which  have  considered  the  question  and  which  have  rec- 
ommended terms  to  their  members.  While  some  may  call 
their  committee  one  on  "terms  and  discounts,"  the  inter- 
relation of  both  is  recognized,  and  no  attempt  is  made  to 
regulate  one  without  regulating  the  other.  Although  these 
terms  are  not  universally  adhered  to  by  any  manner  of 
means,  even  as  a  rule  by  any  one  member,  nevertheless 
they  represent  a  norm  or  standard  for  the  particular  in- 
dustry in  question.  The  distinctive  character  of  the  credit 
problems,  and  the  resultant  interrelation  of  the  discount 
and  the  net  terms,  have  a  sound  basis  in  theory  and  are 
being  recognized  in  actual  practice  to  an  ever  increasing 
degree. 

Ptinction. — ^As  already  noted,  the  use  of  a  cash  discount 
serves  as  a  ready  means  of  dividing  buyers  into  two  general 


74     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

classes.  It  is  somewhat  higher  than  the  current  rate  of 
interest,  hence  will  be  taken  by  every  buyer  who  can 
possibly  do  so,  either  with  his  own  funds  or  with  funds 
borrowed  from  the  bank.  In  other  words,  it  is  taken  by 
those  buyers  whose  credit  standing  is  superior.  It  thus 
furnishes  the  seller  with  a  means  of  judging  the  credit 
standing  of  his  customers  and  also  eliminates  the  credit 
risk  on  a  considerable  part  of  his  accounts.^  Thus  it  also 
enables  him  to  concentrate  his  attention  upon  the  poorer 
credit  risks  which  do  not  take  the  discount,  and  hence  tends 
to  increase  the  efficiency  of  his  credit  work,  at  the  same 
time  that  it  curtails  the  total  amount  of  such  credit  work 
and  reduces  the  cost  of  the  credit  department.  It  should 
tend  to  decrease  the  amount  of  loss  due  to  bad  debts,  al- 
though the  proportion  on  accounts  which  run  to  the  net 
period  will  naturally  be  larger  than  if  no  discount  were 
granted,  and  the  larger  actual  loss  otherwise  sustained  were 
compared  with  the  total  sales. 

This  is  the  situation  from  the  mercantile  point  of  view. 
It  should,  however,  be  remembered  that,  as  most  buyers 
do  not  have  the  cash  themselves  with  which  to  discount  their 
bills,  they  must  turn  to  the  bank.  The  use  of  the  cash 
discount,  therefore,  results  in  having  the  buyer  as  far  as 
possible  obtain  his  funds  directly  from  the  bank,  instead 
of  having  recourse  to  the  seller  through  buying  on  time 
and  taking  the  net  terms.  The  bank  then  measures  the 
credit  of  the  buyer  directly,  and  not  the  seller.  The  latter 
measures  only  the  credit  of  the  poorer  accounts  which  do 
not  take  the  discount,  and  himself  borrows  from  the  bank 
in  turn  in  order  to  obtain  funds  with  which  to  carry  these 
accounts.  He  thus  in  effect  guarantees  such  accounts  to 
the  banking  system.  He  then  has  either  a  contingent  lia- 
bility on  receivables  which  he  has  rediseounted  or  a  direct 

*This  is  of  course  more  important  in  certain  lines  than  in  others. 
The  longer  the  net  terms,  the  more  certain  a  cash  discount. 


CASH  DISCOUNTS  75 

liability  for  his  own  borrowings,  whereas  with  the  buyer 
who  takes  the  cash  discount  he  assumes  no  liability 
whatsoever. 

Length  of  the  Cash-Discount  Period. — Cash  with  order 
(C.  B.  D,,  or  cash  before  delivery)  is  generally  not  required. 
Instead,  the  thought  is  rather  to  grant  the  cash  discount 
for  payment  within  a  time  sufficient  to  transport  the  goods 
from  seller  to  buyer,  and  in  addition  to  give  the  buyer  an 
opportunity  to  examine  them  and  to  check  them  up  with 
the  invoice.  This  time  accordingly  governs  the  length  of 
the  cash-discount  period.  It  varies  considerably  in  the 
different  industries.  The  necessity  for  it  is  determined 
largel}'  by  the  nature  of  the  article,  and  the  general  com- 
petitive conditions  which  exist  in  the  particular  industry 
in  question.  Standard  goods  do  not  require  the  same 
careful  examination  as  do  non-standard  ones,  nor  are  buyers 
in  industries  in  which  general  competitive  conditions  are 
upon  a  high  plane,  under  the  necessity  of  insisting  in  all 
cases  upon  inspecting  the  goods  before  paying  for  them. 
Wholesale  grocers  in  discounting  bills  regularly  remit 
before  the  goods  arrive.  On  the  other  hand,  lumber  needs 
careful  examination,  and  elaborate  provision  is  therefore 
made  in  the  terms  for  taking  the  cash  discount  in  the  event 
that  the  car  has  not  arrived  within  the  specified  cash  dis- 
count period.  The  recommended  terms  of  the  National 
Wholesale  Lumber  Dealers  Association  permit  the  discount 
to  be  deducted  for  payment  within  the  period  of  80  per 
cent  of  the  net  amount  of  the  invoice  (estimated  freight 
deducted).  Prepayment  of  this  sum  does  not  forfeit  the 
right  to  make  corrections,  and  the  balance  is  due  within 
10  days  after  arrival  and  unloading.  In  other  lines  where 
inspection  is  desired,  such  as  furniture,  both  the  cash-dis- 
count period  and  the  net  terms  are  often  lengthened  in  the 
case  of  shipments  to  distant  territories,  as  was  seen  in  the 
preceding  chapter. 


76     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

The  cash-discount  period  is  usually  10  days.  In  some 
cases,  however,  15  days  or  20  days  may  be  specified,  and 
monthly  settlement  is  often  permitted.  In  the  latter  case, 
the  regular  cash-discount  period  commences  on  the  first  of 
the  following  month,  and  proximo  or  e.  o.  m.  terms  are 
obtained,  which  represent  a  grouping  of  transactions. 
Further  exceptions  to  the  customary  period  occur  in  cases 
where  salesmen  are  used  to  collect  bills  on  their  regular 
visits  to  the  trade,  which  often  leads  to  grouping  on  a  less 
than  monthly  basis,  and  in  cases  where  arrival  terms  are 
used. 

Methods  of  Quoting. — The  cash  discount  may  be  quoted 
in  any  one  of  several  ways.  The  usual  method  is  as  a  certain 
percentage  of  the  face  amount  of  the  bill,  from  which  it  is 
then  deducted.  In  some  wholesale  lines,  notably  groceries, 
the  discount  is  frequently  averaged  on  a  given  bill  of  goods 
at  a  uniform  figure,  instead  of  deducting  the  specific  per- 
centage on  each  individual  item.  As  the  discount  on  the 
average  will  be  about  1  1/2  per  cent,  this  amount  is  de- 
ducted, instead  of  considering  whether  each  item  falls 
within  the  1  per  cent  or  2  per  cent  group.  This  practice  is 
of  course  more  convenient  in  billing. 

In  various  lines,  however,  a  price  differential,  stating  a 
definite  amount  in  cents  per  unit  of  product,  is  quoted 
instead  of  a  percentage.  In  the  building  supply  lines, 
cement  manufacturers  formerly  granted  2  cents  per  barrel 
for  payment  within  10  days  from  date  of  shipment,  but 
increased  the  amount  at  the  opening  of  1916  to  5  cents  per 
barrel  as  a  result  of  the  increase  in  the  price  of  the  product. 
In  1920,  certain  producers  increased  the  figure  to  10  cents, 
which  was  equivalent  at  the  time  to  a  little  less  than  3  per 
cent.  While  some  of  the  larger  manufacturers  of  common 
brick  grant  a  regular  cash  discount,  which  ranges  from 
2  per  cent  to  5  per  cent  10  days  e.  o.  m.,  in  certain  localities, 
especially  the  far  West,  discounts  as  high  as  $1,00  per 


CASH  DISCOUNTS  77 

thousand  have  been  granted  for  payment  within  30  days 
from  shipment,  and  a  price  differential  of  $1.00  is  fre- 
quently quoted  as  between  cash  and  credit  shipments. 

A  similar  situation  exists  in  the  ease  of  certain  food- 
stuffs. In  California,  wholesale  grocers  allow  a  price 
differential  on  sales  of  sugar,  although  in  the  remainder 
of  the  country  the  regular  discount  is  employed.  Since 
August,  1918,  this  amounts  to  10  cents  10  days  per  100 
pounds,  in  northern  California,  and  10  cents  for  payment 
by  the  10th  and  25th,  in  southern  California.  In  the  case 
of  flour,  there  is  customarily  a  price  differential,  which 
generally  amounts  to  5  cents  per  barrel,  and  sometimes  10 
cents,  for  payment  by  sight  draft  instead  of  arrival  draft, 
but  this  depends  upon  the  distance  the  flour  is  shipped. 

Terms  in  the  anthracite  coal  industry  afford  another 
illustration  of  price  differentials.  The  company  prices  vary 
according  to  a  regular  schedule  from  month  to  month 
throughout  the  year,  being  lowest  in  the  months  of  slack 
demand,  in  an  endeavor  to  stimulate  purchasing.  As  such, 
they  may  be  considered  to  represent  a  price  differential  or 
discount  which  serves  in  lieu  of  a  dating.  Finally,  in 
certain  lines,  such  as  on  sales  of  tobacco  products  to  small 
retailers,  the  cash  discount  is  already  deducted  from  the 
price,  and  the  buyer  is  quoted  only  a  net  cash  price. 

Another  exception  to  the  usual  method  of  quoting  cash 
discounts  is  seen  in  cases  where  the  terms  are  quoted  on 
one  basis,  but  settlement  is  required  on  another.  This  is, 
however,  somewhat  rare,  and  the  best  example  is  afforded 
by  terms  on  green  coffee.  A  leading  importer  provides  that 
on  sales  to  domestic  buyers  in  lots  of  200  bags  or  more  the 
basis  shall  be  90  days,  less  interest  at  the  rate  of  8  per  cent 
per  annum  for  unexpired  time.  Full  settlement  in  any 
event,  however,  is  to  be  made  within  30  days,  and  a  cash 
discount  of  2  per  cent  (based  on  the  rate  of  8  per  cent  per 
annum  for  90  days)  for  approximate  amount  in  New  York 


78      THE  MECHANISM  OF  COMMERCIAL  CREDIT 

funds  is  granted,  when  mailed  by  buyer  on  day  of 
shipment. 

Size  of  the  Discount. — Theoretically  speaking,  once  the 
net  terms  and  the  current  rate  of  interest  are  given,  the 
size  of  the  cash  discount  is  fixed.  In  mathematical  lan- 
guage, the  one  is  a  fimction  of  the  other,  so  that  the 
adjustment  should  be  quasi-mechanical.  But  in  actual 
practice  the  matter  is  not  so  simple.  Various  and  complex 
forces  are  at  work.  Some  range  of  variation  therefore 
exists,  within  which  the  cash  discount  may  differ  from  the 
theoretically  fixed  standard.  This  refers  to  the  cash  dis- 
count proper,  using  the  word  in  its  narrower  sense.  As 
has  been  seen,  in  addition  to  the  cash  discount  proper,  the 
discount  actually  quoted  may  include  a  greater  or  lesser 
element  of  the  trade  discount,  even  for  payment  at  what 
is  practically  the  net  period. 

The  factors  which  bring  about  this  variation  from  the 
standard,  or  which  cause  a  trade  discount  element  to  be 
injected  into  a  cash  discount,  are  in  a  broad  way  the  same 
as  those  already  considered  as  governing  the  length  of  the 
net  terms.  One  of  these  factors  has  to  do  with  the  rate  of 
turnover  of  the  merchandise.  Slower  moving  articles  gen- 
erally carry  a  higher  discount.  This  serves  in  a  way  to 
offset  the  longer  time  required  and  in  addition  to  minimize 
the  risk,  as  a  larger  proportion  of  accounts  tend  to  discount 
their  bills.  The  cheaper  grades  of  merchandise  frequently 
turn  over  more  rapidly  than  'the  'better  grades,  and  the 
discounts  differ  accordingly.  Cheaper  dresses  are  said  to 
be  sold  largely  on  terms  of  net  10  days  or  2  per  cent  10 
days,  but  fine  and  medium  grade  dresses  carry  terms  of 
8  per  cent  10  days  (in  some  cases  with  e.  o.  m.  terms  or 
30  days  extra),  and  some  extremely  high  priced  dresses 
carry  terms  of  8  per  cent  10  days  or  7  per  cent  10  days,  60 
days  extra.  The  same  difference  is  found  in  the  fur  indus- 
try.   Manufacturers  usually  sell  fine  furs  with  a  7  per  cent 


CASH  DISCOUNTS  7J> 

discount,  while  they  sell  cheap  furs  for  the  winter  season 
with  a  2  per  cent  discount.  They,  however,  sell  cheap  furs 
for  summer  with  a  7  per  cent  discount,  due,  it  has  been 
suggested,  to  the  fact  that  when  the  fur  trade  was  a  one- 
season  business,  special  inducements  were  necessary  to 
stimulate  early  orders,  and  these  persisted  even  after  the 
industry  had  assumed  a  two-season  character. 

The  Credit  Risk. — The  other  factors  may  be  considered 
largely  as  manifestations  of  the  general  competitive  condi- 
tions which  prevail  in  the  industry.  At  the  present  place, 
it  is  unnecessary  to  consider  the  entire  list  already  elab- 
orated in  Chapter  III.  Instead,  it  will  be  better  to  select 
merely  certain  leading  factors  which  have  special 
application  to  the  present  problem.  These  factors  are  two- 
fold— the  position  of  the  buyer  as  a  credit  risk,  and  the 
position  of  the  seller. 

As  a  general  rule,  the  poorer  the  credit  risk,  the  higher 
is  the  discount  which  is  offered.  By  this  means,  the  buyer 
has  a  greater  inducement  to  pay  cash,  and  a  larger  pro- 
portion of  accounts  accordingly  tend  to  discount  their  bills. 
Where  an  industry  sells  to  two  classes  of  buyers,  the 
discount  to  one  group  may  therefore  be  greater  than  the 
discount  to  the  other,  although  the  net  terms  to  both  are 
the  same.  Manufacturers  of  lead  products  sell  trade  sheet 
lead  and  lead  pipe  on  terms  of  2  per  cent  10  days,  net  30 
days,  while  they  grant  a  discount  of  only  1  per  cent  on 
chemical  sheet  lead  and  chemical  lead  pipe.  The  first  class 
of  items  is  sold  largely  to  jobbers  of  plumbing  supplies  and 
to  plumbers,  while  the  second  class  is  sold  largely  to  the 
chemical  trade.  A  1  per  cent  discount  is  sufficient  induce- 
ment to  the  large  concerns  of  first  class  credit  standing  in 
the  chemical  trade  to  generally  discount  their  bills,  but  it 
is  insufficient  in  the  case  of  jobbers  of  plumbing  supplies 
and  plumbers,  to  whom  a  2  per  cent  discount  is  therefore 
granted.  , 


80     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Partly  as  a  result  of  this  factor,  in  various  industries 
the  greater  the  degree  of  manufacture  of  an  article,  the 
larger  the  discount  which  is  quoted.  This  is  due  to  the  fact 
that  the  buyers  become  smaller  and  poorer  credit  risks.  It 
is  due  also  to  the  fact  that  the  more  highly  manufactured 
goods  are  bought  in  smaller  lots  and  turn  over  more  slowly, 
so  that  more  time  is  needed  to  cover  the  marketing  period, 
and  hence  a  correspondingly  higher  cash  discount.  Terms 
and  discounts  in  the  iron  and  steel  industry  vary  in  this 
manner.  Pig  iron  carries  terms  of  net  30  days,  semi- 
finished products  such  as  billets,  blooms  and  slabs  and 
lighter  rolled  products  carry  the  same  net  terms,  but  with 
a  cash  discount  of  1/2  per  cent  10  days,  and  wire  products, 
sheets  and  tin  mill  products  carry  a  cash  discount  of  2  per 
cent  10  days,  while  the  regular  terms  of  hardware  manu- 
facturers are  2  per  cent  10  days,  net  60  days. 

Position  of  the  Seller. — In  discussing  this  question,  the 
situation  of  the  seller  must  be  considered,  as  well  as  the 
situation  of  the  buyer.  If  the  seller's  capital  position  is 
weak,  he  will  be  willing  to  offer  a  higher  discount  in  order 
to  secure  cash  payment,  rather  than  to  wait  until  the  close 
of  the  net  period.  Some  sellers  of  copper,  for  example,  who 
have  been  in  need  of  cash,  have  given  a  discount  of  1/2  per 
cent  at  times  in  the  past,  although  usually  no  discount  is 
given.  Similarly,  the  newer  and  smaller  manufacturers 
of  machine  tools,  in  order  to  get  funds  quickly,  are  often 
said  to  offer  a  cash  discount,  which  they  discontinue  after 
they  have  been  in  business  several  years  and  have 
become  better  and  more  firmly  established.  Similarly, 
manufacturers  of  mill  supplies  are  often  smaller  than  man- 
ufacturers of  machine  tools  and  are  possibly  not  so  well 
financed,  so  that  the  custom  of  offering  a  cash  discount  is 
much  more  frequent  among  them  than  among  the  machine 
tool  manufacturers. 

On  the  other  hand,  the  discount  may  vary  with  the 


CASH  DISCOUNTS  81 

seller's  margin  of  profit.  The  larger  the  margin,  the  greater 
the  discount  which  he  may  grant,  and  conversely,  the 
narrower  the  margin,  the  more  closely  restricted  is  the  dis- 
count. This  is  well  illustrated  in  the  case  of  some  of  the 
millinery  jobbers  on  the  Pacific  Coast  who  also  sell  various 
dry  goods  items.  These,  it  is  said,  are  sold  on  a  much  closer 
margin  of  profit  than  millinery,  and  terms  on  them  are 
accordingly  2  per  cent  10  days,  60  days  extra,  instead  of 
the  regular  millinery  terms  of  6  per  cent  10  days,  60  days 
extra  (with  season  datings  of  April  1  and  October  1). 
While  this  factor  operates  also  in  normal  times,  it  is  of 
special  imi)ortance  at  a  time  when  prices  are  rising  rapidly. 
The  increase  in  the  cost  of  production  as  the  prices  of  raw 
materials  and  labor  rise,  tends  to  reduce  the  manufacturer's 
usual  margin  of  profit.  The  latter,  therefore,  tends  either 
to  raise  his  own  prices  correspondingly  or  else  to  decrease 
or  eliminate  the  cash  discount.  Many  manufacturers  dur- 
ing the  war  period  therefore  adjusted  their  cash  discounts. 

Net  Terms. — Classified  according  to  size,  discounts  may 
be  considered  as  (1)  non-existent,  net  terms  alone  being 
quoted;  (2)  low;  (3)  high  or  competitive ;  and  (4)  graded, 
several  optional  periods  with  different  discounts  being 
quoted.    Each  of  these  classes  will  be  considered  in  turn. 

In  some  lines,  net  terms  alone  are  quoted.  This  is  con- 
spicuously the  case  with  merchandise  which  serves  a 
manufacturer  as  raw  material  and  is  used  by  him — either 
as  the  chief  material  or  as  an  auxiliary  material — in  work- 
ing up  his  finished  product.  Prominent  among  these 
articles  are  coal  and  coke,  of  which  a  regular  supply  is  used 
currently.  As  was  already  seen,  they  generally  bear  terms 
of  net  30  days,  which  in  some  cases  are  quoted  on  a  proximo 
basis.  Likewise,  capital  goods,  such  as  machinery,  railway 
equipment  and  ships,  usually  bear  no  discount.  Where  the 
amount  is  small,  they  are  sold  on  net  terms  of  30  days,  and 
where  the  amount  is  large  periodical  payments  (without 


82      THE  MECHANISM  OP  COMMERCIAL  CREDIT 

discount)  are  required  as  the  work  progresses.  In  the  latter 
case,  little  time  is  actually  granted  by  the  seller,  while 
where  net  terms  alone  are  quoted,  the  time  granted  is 
generally  short. 

In  several  lines,  what  are  in  effect  net  terms  are  quoted, 
although  a  cash  discount  (which  really  represents  a  trade 
discount)  is  specified.  Manufacturers  of  zinc  sheets 
regularly  quote  terms  of  3  per  cent  10  days,  while  manu- 
facturers of  auto  tires  regularly  quote  5  per  cent  10th 
proximo.  In  the  former  case,  no  net  terms  are  generally 
quoted,  while  in  the  latter  case,  many  manufacturers  like- 
wise quote  no  net  terms.  Where  a  season  dating  is  granted, 
a  similar  situation  may  exist.  Some  manufacturers  of 
men's  clothing,  for  example,  merely  quote  7  per  cent  10 
days,  December  1  and  June  1.  This  has  the  advantage  of 
enabling  the  seller  to  insist  upon  payment  of  accounts  of 
financially  involved  customers  at  any  time  after  the  expira- 
tion of  the  initial  10-day  period.  It  thus  gives  him  a 
superior  legal  position,  although  in  actual  practice  he  may 
informally  grant  more  time  with  correspondingly  reduced 
or  graded  discounts. 

Low  Discounts. — The  scale  of  discounts  most  frequently 
found  is  on  the  basis  of  1  per  cent  10  days  with  net  terms 
of  30  days,  or  2  per  cent  10  days  with  net  terms  of  60  daj's, 
although  in  a  considerable  number  of  cases  a  cash  discount 
of  2  per  cent  10  days  accompanies  net  terms  of  30  days. 
The  discount  is  then  at  the  rates  respectively  of  1  per  cent 
for  20  to  30  days  (or  12  to  18  per  cent  per  annum),  2  per 
cent  for  50  to  60  days  (or  12  to  14.6  per  cent  per  annum), 
and  2  per  cent  for  20  to  30  days  (or  24  to  36  per  cent  per 
annum).  These  are  the  discounts  found  in  some  leading 
lines,  both  manufacturing  and  jobbing,  such  as  groceries 
and  hardware.  At  the  same  time,  in  lines  where  a  higher 
discount  is  quoted,  the  differentials  are  usually  at  about 
the  same  rate,  in  particular  1  per  cent  per  month. 


CASH  DISCOUNTS  33 

In  some  lines,  merely  a  nominal  discount,  such  as  1/2  of 
1  per  cent  10  days  ^vith  net  terms  of  30  days,  is  quoted. 
Where  this  is  the  case,  no  large  percentage  of  accounts  are 
expected  to  discount  their  bills,  as  the  inducement  is  very 
small.  The  discount  is  only  equal  roughly  to  the  current 
rate  of  interest,  and  borrowing  in  order  to  take  it  is  not 
encouraged.  Bills  will  therefore  only  be  discounted  by 
large  buyers  who  have  considerable  surplus  cash.  A  buyer 
who  purchases  a  variety  of  articles  will  naturally  take  full 
time  on  such  items,  and  will  first  discount  those  bills  on 
which  the  discount  is  most  liberal. 

High  or  Competitive  Discounts. — In  other  lines,  high 
discounts  are  the  rule.  That  is,  the  discounts  which  are 
quoted  contain  an  admixture  of  the  trade  discount.  The 
standard  for  manufacturers  of  woolens  and  worsteds,  for 
example,  has  been  7  per  cent  4  months.  Discounts  of  this 
kind  usually  range  up  to  about  10  per  cent,  although  cases 
are  recorded  up  to  16  per  cent,  and  the  lower  figure  may 
be  placed  at  about  5  or  6  per  cent.  While  these  high  dis- 
counts are  often  associated  with  a  long  net  period, 
especially  in  the  textile  and  apparel  lines,  this  long  net 
period,  as  has  been  seen,  is  due  largely  to  the  general  com- 
petitive situation  in  these  industries,  and  so  also  directly 
are  the  high  discounts  quoted.  They  represent  to  a 
considerable  extent  a  concession  by  the  seller.  In  some 
lines  the  discounts  are  adjusted  more  closely  to  the  length 
of  the  net  terms  quoted,  but  in  other  lines  such  as  those 
just  cited  the  competitive  situation  either  leads  to  deviation 
from  this  standard,  or  else  injects  a  trade  discount  feature 
into  both  the  cash  discount  and  the  net  terms  as  ordinarily 
quoted.  The  discount  on  the  whole  is  apt  to  be  larger  in 
lines  where  the  product  is  purchased  for  resale  in  the  same 
form,  and  not  for  further  manufacture.  A  greater  differ- 
ential is  obtained,  and  this  is  of  more  importance  than 
where  a  manufacturing  process  by  the  buyer  intervenes. 


84     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

High  discounts  often  tempt  the  buyer,  in  particular  the 
retailer,  to  abuse  the  terms.  He  buys  on  one  basis  and 
endeavors  to  settle  on  another.  Cases  are  frequently  men- 
tioned where  a  buyer  who  pays  at  the  close  of  the  net  period 
deducts  the  discount  and  adds  interest  for  the  time  taken. 
Mr.  Ira  D.  Kingsbury  in  a  paper  on  Datings  and  Discounts 
read  before  the  National  Association  of  Clothiers  in  June, 
1914,  gave  details  as  to  how  some  retailers  of  men's  clothing 
had  succeeded  in  obtaining  such  concessions  from  the 
manufacturers.  Similar  complaints  are  heard  in  other 
industries. 

Department  Store  Discounts. — The  department  store  in 
the  past  has  generally  preferred  to  buy  on  a  high  discount 
basis,  and  instances  of  10  per  cent  and  over  are  recorded. 
Its  buyers  have  been  instructed  to  purchase  in  this  manner. 
Especially  are  such  discounts'found  in  the  case  of  luxury 
items  which  involve  large  amounts  and  on  which  the  retail 
price  is  not  closely  figured.  The  store  charges  the  items 
to  the  respective  departments  at  their  total  price 
(neglecting  the  discount),  and  the  resale  price  is  figured 
on  this  basis.  This  leaves  a  considerable  margin  which  goes 
towards  meeting  the  overhead  expenses  of  the  store.  This 
system  of  purchasing  is  susceptible  of  considerable  abuse, 
and  certain  stores  are  generally  stated  to  take  advantage 
of  their  position  .and  force  weak  sellers  to  grant  large  dis- 
counts. An  authority  in  the  dress  and  waist  industry  told 
the  writer  that  he  knew  of  concessions  "all  the  way  up  to 

16  per  cent  and  paying  for 's  advertising."    Such 

tactics,  however,  are  by  no  means  employed  by  all  stores. 
Other  stores  are  just  as  frequently  pointed  to  as  always 
buying  on  the  regular  terms  prevailing  in  the  various 
industries,  and  do  not  endeavor  to  obtain  concessions  of 
this  kind. 

Graded  Discounts. — What  may  be  termed  graded  dis- 
counts comprise  a  special  class  of  discounts.     Instead  of 


CASH  DISCOUNTS  83 

quoting  merely  one  cash  discount  for  payment  within  a 
certain  period,  and  one  set  of  net  terms,  several  cash  dis- 
counts are  quoted,  declining  in  size  as  the  period  increases 
in  length.  The  number  of  discounts  may  or  may  not  be 
such  that  terms  at  the  longest  period  are  strictly  net.  Some 
wholesale  dry  goods  houses,  for  example,  quote  terms  of 
2  per  cent  10  days,  1  per  cent  30  days,  net  60  days,  while 
the  recommended  terms  of  the  Broad  Silk  Manufacturers 
Division  of  the  Silk  Association  of  America  call  for  6  per 
cent  10  days,  60  days  extra,  5  per  cent  90  days,  4  per  cent 
four  months,  etc.,  until  net  terms  of  8  months  are  reached. 
Furthermore,  woolen  and  worsted  manufacturers  often  sell 
on  terms  of  10  per  cent  30  days,  8  per  cent  60  days  or  90 
days,  and  7  per  cent  four  months,  and  in  this  case,  as  has 
already  been  remarked,  a  trade  discount  element  is  intro^ 
duced.  Where  graded  discounts  are  quoted,  the  poor 
credit  risk  may  not  be  quoted  all  the  options,  but  may 
merely  receive,  for  example,  10  per  cent  30  days  or  8 
per  cent  90  days,  the  better  risks  alone  being  quoted  the 
other  option  also.  That  is,  relating  the  matter  to  the 
principle  of  the  marketing  period,  the  period  of  the  poor 
credit  risk  should  be  shorter.  This  is  only  fair,  inasmuch 
as,  in  the  interest  of  safety,  he  should  have  a  quicker 
turnover. 

But  consider, rather  the  discount.  The  graded  discount, 
with  its  several  options,  serves  to  divide  the  burden  of 
carrying  the  article  between  the  seller  and  the  bank.  It 
invites  the  buyer  to  borrow  what  he  can,  in  order  to  take  as 
large  a  discount  as  possible.  He  thus  carries  the  article 
(through  the  bank)  as  long  as  possible,  and  the  seller  car- 
ries it  for  the  remainder  of  the  marketing  period.  To 
accomplish  this  purpose  in  the  most  effective  way,  the 
discount  should  be  graded  scientifically,  and  should  be 
regressive.  That  is,  it  should  be  more  worth  while  to  a 
buyer  to  pay  in  10  days  rather  than  in  30  days,  than  for 


86     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

him  to  pay  in  30  days  rather  than  in  60  days.  A  scale  of 
discounts  roughly  along  the  following  lines  should  be 
employed : 

First      30  days  l^^  per  cent,  or  roughly  3%  per  cent  cash 
Second  30  days  V/^  per  cent,  "         "        2Vi  per  cent  30  days 
Third     30  days  1  per  cent,      "         "        1  per  cent  60  days 

with  net  term  of  90  days 

By  this  means  the  best  results  would  be  obtained,  while  at 
the  same  time,  if  the  differences  between  the  discounts  for 
the  different  periods  were  not  too  great,  the  small  buyer 
would  not  be  penalized  too  heavily.  In  actual  practice, 
however,  this  plan  is  by  no  means  followed,  and  discounts 
for  successive  periods  are  generally  equal,  the  decline 
usually  being  at  the  rate  of  about  1  per  cent  per  month. 

Anticipation  Rates  and  Past-Due  Rates. — Where  the 
buyer  does  not  pay  within  the  cash  discount  period,  yet 
anticipates  or  pays  prior  to  the  net  period,  some  concession 
is  made.  In  certain  ways,  the  rate  of  anticipation  which  is 
allowed  is  allied  to  the  cash  discount.  The  rate  at  which 
anticipation  is  permitted  is  generally  not,  however,  as  high 
as  the  cash  discount,  and  it  is  usually  expressed  in  the 
same  way  as  interest  rates,  namely,  at  so  many  per  cent 
per  annum.  In  fact,  it  often  is  6  per  cent,  the  legal  rate 
of  interest  in  many  states.  On  the  other  hand,  in  many 
cases  it  is  somewhat  higher;  8  per  cent  is  rather  frequent, 
and  12  per  cent  has  been  found.  In  some  eases,  where  a 
low  rate  is  granted  for  anticipation  of  fairly  long  terms,  it 
may  almost  penalize  the  buyer  who  anticipates  instead  of 
taking  the  first  period  specified.  A  buyer  who  anticipates 
the  broad  silk  terms  of  6  per  cent  10  days,  60  days  extra, 
does  so  at  the  rate  of  6  per  cent  per  annum,  while  if  he  takes 
additional  time  beyond  70  days  the  cost  to  him,  as  has  been 
seen,  is  1  per  cent  per  month  or  12  per  cent  per  annum. 

The  terms  quoted  often  also  specify  the  rate  of  interest 


CASH  DISCOUNTS  87 

which  shall  be  paid  in  case  the  account  runs  beyond  the 
net  terms,  although  this  is  just  as  often  not  done.  The  rate 
generally  appears  to  be  6  per  cent.  In  any  event,  of  course, 
the  legal  rate  of  interest  would  apply,  so  that  no  specifi- 
cation is  actually  needed. 


CHAPTER  VI 

TERMS    IN    RELATION    TO    BUSINESS    CONDITIONS 

Certain  standards  in  net  terms  tend  to  become  estab- 
lished as  a  result  of  the  three  forces  which  were  considered 
in  Chapters  II  and  III,  and  so  also  certain  corresponding 
cash  discounts.  But  over  a  series  of  years  the  standards 
themselves  regularly  change.  Aside  from  a  long-run  ten- 
dency in  one  direction,  which  goes  on  steadily  for  an  ex- 
tended period,  there  is  a  rhythmic  ebb  and  flow  over  shorter 
periods  of  time.  Terms  now  lengthen  and  now  shorten. 
This  wave-like  movement  occurs  in  response  to  changes  in 
general  business  conditions.  Terms  vary  in  accordance 
with,  and  parallel  the  course  of,  the  business  cycle.  The 
movement  manifests  itself  in  several  ways.  It  occurs  much 
more  largely  in  the  terms  quoted  by  individual  houses  than 
in  the  regular  terms  in  the  different  industries  which  have 
a  tendency  to  remain  fixed.  But  it  occurs  even  more 
largely  in  the  manner  in  which  such  terms  are  observed. 
This  is  reflected  in  the  percentage  of  accounts  Avhich  dis- 
count their  bills  and  in  the  promptness  of  collections.  It 
is  in  these  directions  that  the  principal  changes  occur. 

The  Business  Cycle. — The  best  current  thought  as  to  the 
course  of  business  conditions  recognizes  the  existence  of  a 
business  cycle,  which  contains  in  a  broad  way  three  stages : 
(1)  prosperity,  (2)  crisis  and  (3)  depression.  The  course 
of  business  is  continuous.  There  is  a  steadily  changing 
process ;  business  passes  through  each  stage  in  turn  until  it 
gradually  reaches  the  next,  and  when  one  cycle  is  com- 
pleted another  begins  all  over  again.  In  any  one  cycle 
there  is  first  a  period  of  revival  which  turns  after  a  while 

88 


RELATION  TO  BUSINESS  CONDITIONS       89 

into  cTinmlative  prosperity.  The  past  activity  of  business 
leads  to  greater  and  still  greater  activity.  But  in  the  course 
of  this  acceleration  of  activity  serious  elements  of  weakness 
develop  in  the  business  structure  and  system,  and  these 
in  time  are  sufficient  to  cause  a  change.  From  being  on  the 
up-grade,  business  activity  turns  to  the  down-grade.  As 
activity  cumulatively  lessens,  business  enters  a  second  stage. 
The  change  is  either  gradual,  as  in  the  United  States  in 
1920,  and  is  termed  a  crisis,  or  it  may  become  spectacular, 
as  in  1907,  and  degenerate  into  a  panic.  Following  this 
second  period  is  a  third,  that  of  depression.  In  this  period 
the  cumulative  readjustment  of  business  proceeds,  and  the 
commercial  and  industrial  community  gradually  puts  its 
house  in  order.  At  length,  business  emerges  from  the  third 
period  and  enters  the  first  stage  of  a  new  cycle.  A  new 
period  of  revival  and  prosperity  commences. 

The  course  of  the  cycle  has  been  sketched  in  merest  out- 
line.^ No  sharp  lines  actually  exist  which  divide  one 
period  from  another,  and  the  several  periods  blend  into 
each  other.  The  length  of  any  two  cj'cles  is  by  no  means 
the  same,  and  no  fixed  length  may  be  assigned  to  any  of 
the  stages  in  the  cycle.  The  process  of  change  manifests 
itself  in  a  gi'eat  variety  of  ways,  and  its  effects  are  many 
fold.  They  are  found  in  production,  in  trade  and  in 
prices,  no  less  than  in  banking  and  in  credit. 

Terms  and  General  Business  Conditions. — Credit  alone 
concerns  us  here.  It  is  necessary  to  trace  its  course  in 
detail  throughout  the  three  stages  of  the  cycle.  Take  first 
the  period  of  prosperity.  It  is  generally  held  that,  as  busi- 
ness activity  increases  and  prices  rise,  it  becomes  more  and 
more  attractive  for  the  business  man  to  borrow  as  much  as 
possible,  instead  of  relying  merely  upon  his  own  capital. - 

'See  Mitchell,  Business  Cycles  (Berkeley,  1913). 
*See  Veblen,   Theory  of  Business  Enterprise   (New  York,  1915), 
Chap.  iv. 


90     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

He  is  enabled  to  expand  his  scale  of  operations  and  thus  to 
share  to  a  greater  degree  in  the  existing  prosperity,  at  the 
same  time  that  his  costs  are  lessened,  due  to  the  fact  that 
the  capital  so  borrowed  obtains  only  a  fixed  interest  re- 
turn. He  is  able  to  borrow  because  of  the  increase  in  the 
capitalized  value  of  his  enterprise  as  a  result  of  the  increase 
in  anticipated  profits.  Consequently,  the  volume  of  credit 
outstanding  is  pyramided,  and  tends  to  increase  much  more 
rapidly  than  the  volume  of  goods  which  are  produced,  until 
finally  a  break  comes. 

Which  direction  does  this  credit  extension  take?  It  has 
at  times  been  stated  that  at  the  end  of  a  period  of  credit 
expansion  business  houses  prefer  to  buy  on  time,  and  an 
expanded  network  of  mercantile  credit  is  consequently 
found.  This  would  seem  to  imply  that,  due  to  a  desire  for 
an  increased  volume  of  business,  sellers  have  granted  addi- 
tional time  in  order  to  stimulate  sales.  But  during  the 
period  of  prosperity,  merchandise  is  in  good  demand  and 
sales  are  made  readily.  A  seller's  market  is  found,  and 
goods  may  become  scarce  in  certain  lines.  Moreover,  as 
prices  rise  a  strain  is  placed  upon  the  seller  to  finance  him- 
self. This  is  especially  the  case  with  the  manufacturer, 
for  it  is  well  known  that  increases  in  the  prices  of  raw 
materials  and  semi-manufactured  goods  generally  tend  to 
outrun  increases  in  the  prices  of  manufactured  products. 
Only  in  the  case  of  industries  in  which  considerable  trading 
develops,  and  much  speculation  accompanies  the  rising 
prices,  would  it  appear  that  terms  might  lengthen  some- 
what. On  the  whole,  therefore,  terms  would  appear  to 
shorten  instead,  and  the  increased  volume  of  credit  would 
appear  to  result  from  borrowing  by  buyers  direct  from 
banks  in  order  to  take  cash  discounts.  In  other  words,  in 
the  credit  structure  business  houses  are  tied  directly  to 
the  banks  during  the  period  of  prosperity,  rather  than  to 
other  business  houses.    In  fact  terms  tend  to  be  shortened. 


RELATION  TO  BUSINESS  CONDITIONS       91 

This  condition  prevails  until  just  prior  to  the  crisis  or 
turn  in  business  conditions.  As  business  hesitates,  the 
sellers  lose  their  domination  over  the  market,  and  may  well 
lengthen  terms  somewhat  as  an  inducement  to  keep  up 
sales.  The  situation  is  very  complex,  and  it  is  difficult  to 
locate  the  exact  moment  of  change,  in  particular  with  re- 
spect to  terms.  It  is  likewise  difficult  to  determine  the 
exact  relation  in  point  of  time  between  the  change  in  terms 
and  the  change  in  general  business  conditions.  When  the 
new  trend  of  business  in  the  reverse  direction  is  definitely 
ascertained,  or  at  least  the  check  to  the  upward  movement, 
terms  at  first  may  again  well  be  somewhat  shortened. 
Prices  are  falling,  conditions  are  uncertain  and  business 
men  are  hesitant. 

As  business  passes  through  the  third  stage,  that  of  depres- 
sion, terms  distinctly  tend  to  lengthen.  Sellers  no  longer 
control  the  market,  and  hence  offer  such  concessions  to 
buyers.  The  instinct  of  caution  is  overcome  by  the  desire 
for  business.  Moreover,  the  buyer's  turnover  is  less  rapid 
and  his  marketing  period  is  correspondingly  longer  than 
when  times  are  brisk.  At  the  same  time,  after  the  process 
of  liquidation  is  completed,  sellers  possess  surplus  funds 
which  are  available  to  extend  this  additional  time.  All 
these  forces  make  for  longer  terms.  The  point  of  maximum 
length  is  perhaps  reached  shortly  after  the  opening  of  the 
new  period  of  revival  and  prosperity.  The  older  long  terms 
are  continued  somewhat  into  the  new  period  and  help  to 
stimulate  it  and  bring  about  the  change  in  the  course  of 
business.  Once  prosperity  is  firmly  established,  terms  again 
shorten  and  the  cycle  commences  all  over  again. 

Movement  of  Terms  in  Particulax  Industries. — This  sit- 
uation with  respect  to  conditions  in  general  is  merely  a 
reflection  and  a  synthesis  of  the  conditions  which  prevail 
in  a  host  of  individual  industries.  In  each  of  these,  market 
conditions  and  the  relations  of  demand  and  supply  likewise 


92     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

show  a  wave  movement  over  a  period  of  time,  entirely  apart 
from  the  normal  relation  between  buyer  and  seller  con- 
sidered in  Chapter  III.  At  times  a  buyer's  market  exists, 
at  times  a  seller's  market.  The  terms  in  use  vary  accord- 
ing to  these  changes.  Different  lines  differ  in  the  degree  of 
responsiveness  of  terms  to  market  conditions,  and  in  some 
lines  terms  are  much  more  flexible  than  in  others.  Par- 
ticularly responsive  are  those  industries  in  which  there  is 
considerable  trading  in  an  unorganized  open  markgt.  The 
movement  of  terms  in  this  manner  is  well  recognized  in 
certain  industries,  and  the  war  period  further  served  con- 
spicuously to  point  out  the  fact  in  others,  as  will  be  seen  in 
more  detail  later.  JPrime  western  zinc,  for  example,  was 
scarce  during  the  early  part  of  the  war  period,  and  pro- 
ducers '  sales  accordingly  were  almost  wholly  on  sight  draft, 
but  since  the  middle  of  1917,  it  has  been  in  free  supply 
and  leading  consumers  have  been  able  to  re-establish  the 
former  terms  of  net  10  days  to  net  30  days  from  date  of 
shipment.  In  a  totally  different  industry,  a  Boston  whole- 
saler of  anthracite  coal  states  that  when  conditions  are 
normal,  considerably  over  30  days  is  often  extended,  but 
in  times  of  shortage  retailers  collect  more  promptly  and 
thus  are  enabled  in  turn  to  pay  wholesalers  more  promptly. 
Discounts  and  Business  Conditions. — The  situation  with 
respect  to  the  length  of  net  terms  which  has  been  described 
should  appear  to  be  reflected  in  the  situation  which  exists 
with  respect  to  the  rate  of  cash  discount  quoted.  Such 
rates,  however,  are  related  not  merely  to  the  length  of  the 
net  terms,  but  also  to  the  current  rate  of  interest.  During 
the  period  of  prosperity,  interest  rates  gradually  increase 
as  business  becomes  more  active  and  the  demand  for  funds 
increases.  They  reach  a  peak  during  the  second  or  crisis 
period,  and  then  fall  during  the  period  of  depression,  reach- 
ing a  low  point  at  the  opening  of  the  period  of  prosperity, 
when  they  aid  in  preparing  the  way  for  the  revival  which 


RELATION  TO  BUSINESS  CONDITIONS       93 

takes  place.  Thus  not  only  do  the  net  terms  change  in 
response  to  the  course  of  the  business  cycle,  but  the  relation 
between  the  length  of  the  net  terms  and  the  size  of  the 
cash  discount  also  changes  as  the  current  rate  of  interest 
changes  in  accordance  with  the  course  of  the  cycle. 

Considered  with  respect  to  their  influence  upon  the  size 
of  the  discount,  these  two  influences  operate  in  opposite 
directions,  and  tend  to  offset  one  another.  While  interest 
rates  rise  during  the  period  of  prosperity,  and  thus  tend  to 
increase  the  rate  of  cash  discount,  the  net  terms  shorten, 
and  therefore  tend  to  decrease  the  discount.  The  reverse 
is  the  case  during  the  period  of  depression.  In  other  words, 
these  two  influences  tend  to  keep  the  discount  constant,  or 
at  least  to  introduce  a  certain  measure  of  stability  into  it. 
However,  the  adjustment  between  these  forces  is  by  no 
means  pei'fect,  and  it  is  even  more  difficult  to  trace  the 
changes  in  the  discounts  actually  quoted  than  it  was  in 
the  case  of  the  net  terms. 

In  actual  fact,  there  is  no  great  nicety  of  adjustment  in 
discount  rates.  They  are  generally  relatively  large  in  size 
as  compared  with  current  interest  rates,  and  the  pressure 
for  funds  which  exists  is  probably  a  more  potent  force.  The 
influence  of  business  conditions  is  accordingly  seen  rather 
in  the  changes  which  occur  in  the  percentage  of  accounts 
taking  the  discount.  High  interest  rates  reflect  "tight" 
money.  As  funds  become  more  difficult  to  procure,  it  be- 
comes necessary  for  the  buyer  to  take  the  full  net  period 
and  let  his  accounts  run  until  maturity,  instead  of  dis- 
counting them.  At  the  same  time,  the  seller  desires  pay- 
ment as  promptly  as  possible,  and  may  ^actually  increase 
the  discount  in  order  to  induce  discounting  of  bills  instead 
of  payment  at  the  close  of  the  net  period,  in  spite  of  the 
fact  that  he  shortens  the  net  period  itself.^    At  the  peak  of 

^  Other  considerations  may  also  enter.    The  seller  may  decrease  the 
discount  in  order  to  keep  prices  down  as  much  as  possible. 


94     THE  MECHANISM  OP  COMMERCIAL  CREDIT 

the  period  of  prosperity,  this  conflict  between  the  interests 
of  buyer  and  seller  is  most  accentuated.  When  activity 
decreases  after  the  crisis  and  business  definitely  enters  the 
period  of  depression,  interest  rates  decrease  as  the  demand 
for  funds  diminishes,  and  the  percentage  of  accounts  taking 
the  discount  tends  to  increase. 

Wartime  Changes. — The  war  period  represents  a  dis- 
tinctive epoch  in  the  history  of  terms  of  sale  in  the  United 
States.  At  that  time  two  influences  came  together.  On  the 
one  hand,  the  period  of  prosperity  in  the  business  cycle  was 
present  in  accentuated  fashion.  There  was  a  heavy  demand 
and  a  strong  sellers'  market,  in  general,  and  especially  in 
the  case  of  certain  individual  commodities.  That  part  of 
the  changes  in  terms  during  the  period  was  due  to  changes 
in  general  business  conditions  is  seen  from  the  fact  that 
terms  in  certain  lines  which  were  shortened  have  again 
tended  to  lengthen  as  the  post  Avar  change  in  business  con- 
ditions has  become  evident.  On  the  other  hand,  throughout 
the  period  there  continued  a  movement  to  shorten  terms, 
which  had  previously  made  its  appearance.  These  two  in- 
fluences were  in  the  same  direction  and  tended  towards  the 
same  ends.  They  thus  served  to  re-enforce  each  other,  and 
to  bring  into  extra  strong  relief  the  tendencies  in  terms 
which  resulted  from  them. 

In  part,  these  war  changes  were  made  at  the  instance,  or 
under  the  encouragement,  of  organizations  designed  to  aid 
dn  furthering  the  prosecution  of  the  war.  It  was  urged  that 
the  greatest  possible  efficiency  should  be  obtained  in  the 
credit  and  financial  system,  as  well  as  in  other  fields.  This 
it  was  proposed  principally  to  accomplish  in  two  ways:  (1) 
through  the  use  of  the  trade  acceptance  system,  which  will 
be  discussed  at  greater  length  later,  and  (2)  through  a 
shortening  of  credits  and  prompter  collections.  By  the 
latter  means,  the  merchant  would  obtain  quicker  turnover 
of  his  capital,  and  maximum  use  might  be  made  of  the 


RELATION  TO  BUSINESS  CONDITIONS       95 

funds  available  to  finance  the  larger  volume  of  business 
done.  The  chairman  of  the  committee  on  commercial 
economy  of  the  State  Council  of  Defense  of  Washington,  in 
an  address  before  the  wholesale  grocers'  association  of  that 
state  at  Tacoma  on  October  11,  1918,  stated  that  business 
should  get  as  near  a  cash  basis  as  possible,  advocated  a 
"pay-as-you-go"  policy  for  retailer  as  well  as  consumer, 
and  proposed  that  terms  be  limited  to  30  days  with  a  dis- 
count period  of  10  days.  The  adoption  of  a  proposal  of 
this  kind  undoubtedly  would  result  in  curtailing  the  volume 
of  credit,  especially  on  the  poorer  risks.  On  the  other  hand, 
it  would  merely  have  a  tendency  to  make  the  intermediate 
risks  deal  directly  with  a  bank  as  far  as  possible  in  order 
to  obtain  funds,  instead  of,  as  at  present,  buying  on  time 
from  a  business  house  which  itself  must  borrow  from  a  bank 
in  order  to  carry  them.  There  would  be  no  effect  upon  the 
best  risks,  as  they  at  present  already  go  direct  to  the  bank. 
Types  of  Changes. — The  actual  changes  in  terms  during 
the  war  were  most  pronounced  in  two  types  of  lines.  They 
were  especially  apparent  in  industries  in  which  there  was 
a  strong  scarcity  of  goods.  This  was  notably  the  case  in 
various  branches  of  the  textile  industry.  Here  the  short- 
ening of  terms  appeared  in  various  forms.  The  season 
dating  which  had  been  previously  granted  on  certain  items, 
such  as  underwear,  was  eliminated.  On  other  items,  terms 
were  shortened  by  some  sellers  to  as  little  as  10  days,  and 
buyers  were  required  to  take  the  goods  at  once,  instead  of 
having  them  delivered  only  as  they  desired  them.  They 
might  therefore,  for  example,  receive  goods  in  the  spring 
several  months  before  they  actually  needed  them,  and  thus 
an  increased  burden  would  be  placed  upon  them.  This 
situation  was  vividly  depicted  by  Mr.  Thos.  A.  Fernley, 
Secretary  of  the  National  Wholesale  Dry  Goods  Associa- 
tion, in  a  "Market  Service  Letter"  to  his  membership 
under  date  of  April  28,  1920,  reading  in  part  as  follows: 


96     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

It  is  only  since  the  war  period  that  an  intensive  sellers'  market 
has  caused  a  withdrawal  of  the  reasonable  terms  and  diseoimt 
arrangements  by  the  manufacturers,  commission  houses  and  selling 
agents. 

Coupled  with  the  restrictions  in  terms  has  been  the  demand 
that  the  wholesaler  take  goods  far  in  advance  of  the  season  for 
immediate  paj-ment  where  such  goods  are  sold  on  60  days'  terms, 
making  it  necessary  for  the  wholesaler  to  strain  his  financing 
arrangements  to  the  limit  to  finance  not  one,  but  two  or  three 
seasons'  goods  at  the  same  time. 

One  wholesale  dry  goods  house  reports  that  they  now  have  in 
stock,  or  on  the  way  or  on  order  and  quite  certain  of  shipment, 
four  million  dollars'  worth  of  merchandise  which  is  payable  before 
June  1st. 

This  wholesaler  further  states  that  a  considerable  quantity  of 
this  merchandise  is  sold  to  the  trade  with  October  1  dating.  Fur- 
ther, that  later  on,  they  will  be  called  on  to  take  in  another 
season's  goods  far  in  advance  of  the  time  they  are  needed. 

It  should  be  borne  in  mind  that  the  manufacturers  are  not 
solely  to  blame  for  present  conditions  as  the  buyers  have  in  many 
instances  urged  the  manufacturers  to  make  advance  deliveries  for 
fear  of  a  shortage  later,  and  other  buyers  have  felt  obliged  to  do 
likewise  in  order  to  protect  their  interests. 

The  wholesalers  consider  it  an  increased  hardship  to  be  asked 
to  take  in  fall  merchandise  during  the  months  of  January,  Feb- 
ruary and  March  and  pay  for  the  goods  in  10  days,  making  the 
average  fall  purchases  payable  February  10,  and  in  turn  hold 
the  goods  until  at  least  September,  or  7  months,  and  then  bill 
them  at  2-10  60  extra,  the  retailer  making  payment  for  these 
goods  from  9  to  10  months  after  the  wholesaler  has  paid  the  bill. 

The  wholesalers'  warehousing  ditficulties  in  being  called  on  to 
purchase  and  receive  merchandise  costing  3  times  the  normal  price 
and  carrying  it  in  stock  for  9  months  without  being  able  to  ship 
it,  are  as  obvious  as  the  financial  side  of  the  question. 

It  would  appear  to  be  a  case  wherein  the  manufacturer  foregoes 
the  necessity  of  taking  any  chance,  and  the  retailer  declines  to 
accept  the  risk,  leaving  the  wholesaler  to  assume  and  bear  the 
burden  of  both. 

The  wholesaler  is  aware  of  the  fact  that  the  average  retailer 


RELATION  TO  BUSINESS  CONDITIONS       97 

will  not  take  in  fall  merchandise  in  the  spring,  and  even  if  he 
were  willing,  the  credit  situation  might  make  such  a  policy  unwise. 

An  analysis  of  their  financing  requirements  by  some  of  the 
wholesalers  indicates  that  the  present  tendencies  on  the  part  of 
the  manufacturer  make  necessary  the  financing  of  about  ^  of 
the  wholesaler's  business  in  2  months'  time  and  that  such  a 
necessity  forces  the  wholesaler  to  limit  his  purchases  in  order  to 
meet  the  situation  satisfaetorilj'^  in  a  financial  way. 

Some  mills,  although  quoting  60  days'  terms,  have  attached  high 
rates  of  anticipation  which  must  be  figured  in  the  cost,  and  no 
jobber  can  afford  to  take  advantage  of  the  60-day  term,  prac- 
tically making  the  bill  a  10-day  matter. 

A  svimmary  of  the  foregoing  was  presented  to  several  manu- 
facturers who  conceded  the  fact  that  many  of  the  strictly  war 
measures  had  been  found  so  advantageous  to  themselves  that  they 
had  been  continued,  even  though  the  war  was  practically  over. 

In  the  woolen  and  worsted  industry  after  1917,  manu- 
facturers who  had  been  selling  on  terms  based  upon  7  per 
cent  4  months  tended  to  reduce  the  maximum  time  granted 
to  either  30  or  60  days,  while  the  season  dating  was  also 
frequently  eliminated.  Certain  manufacturers  who  had 
been  selling  on  terms  of  10  per  cent  30  days  took  advantage 
of  the  opportunity  to  eliminate  the  discount,  and  hence- 
forth quoted  terms  of  net  30  days,  although  this  made  no 
difference  in  the  time  actually  granted.  At  the  end  of 
1920,  however,  a  tendency  to  revert  to  the  older  terms 
appeared  as  a  result  of  the  lessened  demand  for  goods. 
During  the  war  period  the  discount  was  decreased  in  other 
lines.  A  tendency  in  this  direction  was  marked,  for  ex- 
ample, in  the  case  of  hardware  manufacturers. 

The  changes  were  also  especiallj''  pronounced  in  those 
lines  in  which  goods  are  purchased  for  resale.  The  whole- 
saler is  the  chief  of  such  buyers.  As  was  indicated  in  the 
quotation  from  Mr.  Fernley,  he  feels  that  he  is  crushed 
between  the  upper  and  the  lower  millstone.  The  larger 
wholesale  lines,  especially  dry  goods  and  hardware,  appear 
to  have  been  affected  to  a  considerable  extent.     On  the 


98     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

other  hand,  the  manufacturer  who  buys  an  article  which 
he  uses  in  producing  another  article  does  not  feel  the  same 
pressure,  and  is  less  concerned  with  the  terms  which  are 
quoted  him.  In  lines  where  manufacturers  sell  both  to 
wholesalers  and  to  other  manufacturers,  and  especially 
where  sales  to  other  manufacturers  are  of  major  impor- 
tance, terms  may  be  fixed  by  the  selling  manufacturers 
regardless  of  the  wishes  of  the  wholesalers.  This  has  been 
the  case  in  various  lines.  Selecting  several  illustrations  at 
random,  wholesale  grocers  were  unable  to  obtain  a  cash 
discount  from  packers  in  1907,  while  in  the  early  part 
of  the  war  period,  manufacturers  of  bolts  and  nuts  reduced 
their  terms  from  2  per  cent  10  days,  net  60  days  to  1  per 
cent  10  days,  net  30  days,  in  spite  of  the  opposition  of  the 
hardware  wholesalers,  and  several  years  ago  wholesale 
druggists  were  unable  to  obtain  the  terms  desired  from 
manufacturers  of  white  lead. 

The  Tendency  to  Shorten  Terms. — For  some  time  prior 
to  the  opening  of  the  war,  movements  had  been  under  way 
in  various  industries  to  shorten  terms.  After  the  cash  dis- 
count-open account  system  had  succeeded  the  former  note 
and  draft  system  in  the  United  States,  the  terms  em- 
ployed in  many  lines  were  long,  and  customary  Settlement 
dates  of  the  kind  described  above  in  Chapter  II  were  found. 
Prior  to  about  1900,  as  has  been  seen,  long  terms  were  in 
use  in  the  steel  industry.  These  were  changed  at  the  open- 
ing of  the  century  in  various  branches  to  substantially  their 
present  basis,  although  a  few,  such  as  bolts  and  nuts,  have 
since  been  further  shortened.  In  the  90 's  a  movement  was 
already  on  foot  among  various  hardware  manufacturers  to 
introduce  net  30-day  terms,  but  the  opposition  of  the  whole- 
salers resulted  in  the  retention  of  the  regular  terms  of  2 
per  cent  10  days,  net  60  days.  The  movement  only  ap- 
peared again  after  the  outbreak  of  the  war  in  1914,  and 
took  the  form  rather  of  decrease  in  or  elimination  of  the 


RELATION  TO  BUSINESS  CONDITIONS        99 

discount  by  certain  manufacturers.  Particular  force  was 
lent  to  the  movement  at  that  time  by  the  advance  in  the 
prices  of  various  hardware  articles  as  the  cost  of  production 
increased,  and  by  the  existence  of  a  sellers'  market.  With 
the  passing  of  war  conditions,  however,  the  movement  lost 
force,  and  in  1918,  the  wholesalers'  body^,  the  National 
HardM'are  Association,  stated  that  "many  of  the  manufac- 
turers who  changed  their  terms  during  the  past  year  rein- 
stated the  discount. ' ' 

A  similar  situation  existed  in  other  lines.  Shortening  of 
manufacturers'  terms  on  woolens  and  worsteds  is  stated  by 
some  authorities  to  date  back  to  the  90 's.  Prior  to  about 
1893,  practically  all  woolen  goods  were  distributed  through 
the  old  fashioned  commission  houses  and  terms  were  almost 
uniformly  10  per  cent  10  days,  9  per  cent  30  days,  8  per 
cent  60  days  and  7  per  cent  4  months,  with  season  datings  of 
June  30  and  December  31.  In  that  year,  the  present  system 
of  separating  the  merchandising  and  financial  ends  of  the 
distribution  of  woolens  began,  and  the  largest  of  the  old 
commission  houses  gradually  dropped  the  merchandising 
end  of  the  business  and  confined  themselves  to  acting  as 
factors.  At  the  same  time,  gradual  shortening  of  the  long 
dating  originally  given  by  these  houses  took  place.  Little 
agreement  exists  among  various  authorities  as  to  the  details 
of  this  movement,  and  it  is  variously  stated  as  having  been 
found  during  the  past  decade  or  since  about  1905,  or  as 
being  particularly  marked  since  about  1912.  At  the  latter 
date  there  was  a  movement  of  manufacturers  away  from 
commission  houses,  and  it  is  stated  that  these  mills  largely 
employed  terms  of  net  30  days.  The  subsequent  changes 
after  the  opening  of  the  war  have  been  sketched  in  the  pre- 
ceding section. 

For  some  years  prior  to  the  war,  wholesale  grocers  had 
likewise  endeavored  to  shorten  their  terms.  In  the  classifi- 
cation of  items  according  to  terms  and  discounts  allowed, 


100    THE  MECHANISM  OF  COMMERCIAL  CREDIT 


efforts  were  made  to  bring  certain  items  from  the  60-day  to 
the  30-day  column,  and  others  from  the  30-day  to  the  net 
column.  Strong  emphasis  was  likewise  placed  upon  the 
need  for  prompt  collections.  The  monthly  reports  of  out- 
standings which  certain  of  the  associations  prepare,  show- 
ing the  percentage  of  bills  and  notes  receivable  outstanding 
on  the  first  of  the  month  to  the  previous  month 's  sales,  have 
had  as  one  of  their  primary  purposes  to  afford  an  indica- 
tion of  the  extent  to  which  closer  collections  are  being  made 
and  terms  are  being  shortened.*  As  a  result  of  this  move- 
ment, the  period  of  credit  has  been  greatly  decreased  in 
various  sections.  This  is  shown  by  the  following 
percentages : 

Fifteen  Colorado  Grocjers 
Average  first  6  months,  1916  141.2 


last  " 

(( 

first  " 

1917 

last   " 

(( 

first  " 

1918 

last  " 

a 

first  " 

1919 

135. 

130. 

125.7 

123.4 

117.9 

112.5 


About  30  California  Grocers 

/.verage  end  of  January,  1917  136.8 

"  "  "  July,    '        "  128.7 

"  "  "  January.  1918  125.8 

"  "  July,  "  115.3 

"  "  "  January',  1919  106.0 

"  "  "  July,  "  105.4 

«  "  "  January,  1920  97.5 

"  «  "  July,  "  100.2 

"  "  "  January,  1921  101.7 

"  "  "  July,  "  95.2 

"  "  "  January,  1922  97.4 

"  "  "  June,  "  95.9 


*See,  for  example,  the  addresses  and  articles  of  Mr.  F.  C.  Letts, 
President  of  the  Western  Grocer  Company,  Chicago, 


RELATION  TO  BUSINESS  CONDITIONS      101 

A  percentage  of  100  means  that  outstandings  equal  one 
month's  sales.  Colorado  grocers  thus  were  able  to  reduce 
their  outstandings  from  42  days'  sales  to  34  days' 
sales  between  1916  and  1919,  while  California  grocers  have 
been  able  to  reduce  their  outstandings  since  1917  from  41 
days'  sales  to  about  29  days'  sales.  Even  greater  de- 
crease of  the  percentage  of  outstandings  has  occurred  in 
some  other  territories.  The  lowest  average  percentage  for 
1921  was  shown  by  Indiana  grocers,  their  figure  being  70.7 
per  cent,  equal  to  somewhat  over  20  days'  sales. 

Other  instances  of  the  shortening  of  terms  might  be 
multiplied,  such  as  the  breakdown  of  the  customary  settle- 
ment date  on  wholesale  hardware  sales  in  the  Pennsylvania 
Dutch  territory,  or  the  substitution  within  the  last  several 
years  of  arrival  draft  terms  on  carload  shipments  of  flour 
into  intermountain  territory  in  place  of  the  former  terms 
of  30  to  90  days  on  open  account. 

The  Movement  to  Standardize  Terms. — A  factor  of  pri- 
mary importance  in  the  movement  to  shorten  terms  is  to 
have  all,  or  at  least  the  larger  part  of  the  firms,  in  a  given 
industry  or  territory  adopt  a  uniform  procedure.  In  some 
industries,  a  certain  set  of  terms  gradually  comes  to  be 
recognized  as  regular,  and  is  employed  by  a  majority  of 
the  firms  in  the  industry.  In  other  lines,  however,  stand- 
ardization is  accomplished  through  the  trade  association 
in  the  industry,  which  will  be  either  national  in  scope,  or 
else  confined  to  a  given  territory,  according  to  the  industry 
in  question.  In  rare  cases,  such  as  for  Huntington,  West 
Virginia,  wholesalers  in  1914,  all  firms  in  a  given  territory 
may  arrange  to  have  uniform  terms.  In  most  instances, 
however,  the  group  which  considers  the  question  is  confined 
to  one  industry  only,  and,  in  fact,  cases  are  found,  such  as 
for  the  Utah-Idaho  Wholesale  Grocers  Association,  where 
terms  agreed  upon  have  been  discontinued  in  view  of  the 
variety  of  items  which  the  individual  house  handles,  and 


102   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

the  matter  accordingly  left  entirely  to  each  house  inde- 
pendently. Terms  are  generally  agreed  upon  by  those 
who  sell  to  retailers,  and  are  found  much  more  largely  in 
the  ease  of  wholesalers  than  of  manufacturers.  As  indi- 
cated above,  the  manufacturer  usually  has  far  less  interest 
in  terms.  In  some  instances,  however,  terms  may  be  part 
of  standard  contracts  which  are  drawn  up  covering  the  sale 
of  various  articles,  or  of  rules  governing  trading  or  dealing 
therein.  This  is  true  of  canners'  sales  of  fruits  and  veg- 
etables, and  of  sales  of  various  agricultural  products,  such 
as  California  raisins  and  beans,  as  well  as  of  open  market 
transactions  in  commodities  like  wheat  or  petroleum,  and  of 
sales  of  raw  and  manufactured  silk. 

In  no  case,  however,  are  the  terms  formally  adopted. 
They  are  merely  recommended  for  the  use  of  the  member- 
ship, and  each  member  is  free  to  do  as  he  sees  fit. 
Accordingly,  the  terms  recommended  are  of  two  classes. 
Certain  terms  are  actually  employed  by  the  majority  of  the 
firms  in  the  industry.  The  figures  of  outstandings  already 
given  for  wholesale  grocers  indicate  considerable  adherence 
to  the  standard  of  1  per  cent  10  days,  net  30  days  found 
in  the  terms  of  the  various  associations  in  that  industry. 
On  the  other  hand,  in  some  lines  the  terms  represent  an 
ideal,  and  are  recommended  for  what  may  be  termed  their 
moral  effect.  The  National  Wholesale  Lumber  Dealers' 
Association  in  1917,  for  example,  reaffirmed  the  terms  it 
had  recommended  in  1902.  This  was  done  in  spite  of  the 
fact  that  there  had  gradually  come  about  widespread 
deviation  from  them,  and  in  the  discussion  at  the  conven- 
tion one  of  the  principal  arguments  advanced  for  their 
retention  was  that  the  ideal  which  they  represented  should 
not  be  lost  sight  of.  The  same  general  situation  exists  in 
the  case  of  the  terms  prepared  by  certain  retailers'  associa- 
tions, although  it  is  not  true  of  the  buying  terms  which 
various  wholesalers'   associations  have   formulated.     The 


RELATION  TO  BUSINESS  CONDITIONS     103 

National  Association  of  Hardware  Retailerg  and  several 
retail  lumber  dealers'  associations  in  various  sections,  for 
example,  have  adopted  order  blanks  or  resolutions  calling 
for  deduction  of  the  cash  discount  on  arrival  of  the  mer- 
chandise, and  commencement  of  the  net  period  from  that 
time.  These  terms  represent  merely  their  desires,  and,  at 
least  in  the  case  of  hardware,  are  employed  only  for  a  small 
minority  of  their  purchases. 

Regular  terms  have  been  found  in  many  industries  for 
years,  and  terms  have  been  formally  recommended  in 
others.  Various  instances  of  the  latter  are  recorded  in 
the  90 's.  The  greatest  impetus,  however,  was  given  after 
1910,  and  a  movement  in  this  direction  was  specially  marked 
during  the  war  period.  The  movement  parallels  the  grow- 
ing recognition  of  the  distinctive  character  of  the  credit 
problems  which  confront  the  business  house,  and  the  fact 
that  competition  should  be  confined  to  the  price  and  mer- 
chandising aspects.  The  movement  of  course  was  aided 
by  the  special  conditions  which  obtained  during  the  war 
period. 

Wholesalers'  Interest  in  Terms. — In  the  movement  for 
standardization  of  terms,  the  wholesaler  has  been  a  leading 
factor.  This  is  true,  however,  only  of  the  so-called 
"regular"  wholesaler.  The  trading  jobber  who  does  not 
provide  a  regular  link  in  the  distributive  chain  between 
manufacturer  and  retailer  pays  little  attention  to  terms. 
Similarly  with  those  wholesalers  who  actually  serve  rather 
as  agents  of  manufacturers  than  as  totally  independent 
entities  themselves.  Machine  tool  dealers,  for  example,  in 
general  have  few  of  the  characteristics  of  regular  jobbers. 
They  work  very  closely  with  their  principals,  the  manu- 
facturers, and  often  carry  only  a  few  samples,  instead  of 
a  large  stock  from  which  they  can  make  immediate  delivery. 
Hence  they  do  not  have  the  same  interest  in  the  terms  on 
which  they  buy  as  do,  say,  wholesalers  of  hardware.     In 


104    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

fact,  the  regular  wholesaler  has  a  distinctive  series  of 
problems  with  respect  to  terms,  and  the  terms  which  he 
employs  will  therefore  be  considered  as  a  unit.  These 
problems  have  been  perhaps  most  thoroughly  considered 
and  fully  worked  out  in  the  grocery  and  hardware  lines. 
The  discussion  accordingly  will  be  confined  largely  to,  and 
the  illustrations  drawn  from  them,  although  the  principles 
are  equally  applicable  to  other  branches  of  wholesale  trade. 
The  wholesaler  considers  both  the  terms  upon  which  he 
buys  and  the  terms  upon  which  he  sells.  In  those  lines  in 
which  selling  terms  have  been  recommended,  a  special  com- 
mittee of  the  trade  association  is  usually  charged  with  their 
formulation,  and  reports  annually  to  the  convention. 
Frequently  its  activities  may  also  embrace  other  phases  of 
credit  work,  such  as  promptness  of  collections,  respecting 
the  discount  period  by  retailers,  etc.  From  1908-1910 
the  National  Wholesale  Grocers'  Association  considered  the 
question  of  terms  of  sale  on  a  national  basis,  but  after  1910 
left  the  matter  entirely  to  the  judgment  of  the  individual 
house.  It  is  difficult,  of  course,  in  view  of  the  wide  variety 
of  items  handled  in  this  and  many  other  jobbing  lines,  and 
the  considerable  differences  between  the  business  of  the 
individual  houses,  as  well  as  the  great  expanse  of  the 
country,  to  lay  down  any  uniform  terms  applicable  under 
any  and  all  conditions.  However,  since  1910  at  least  12 
state  and  territorial  associations  in  the  grocery  line  have 
recommended  terms  to  their  membership,  and  seem  to  have 
met  with  considerable  success.  The  differences  in  terms 
between  the  several  associations  relate  largely  to  the  terms 
on  certain  individual  items  in  the  classifications  which  thej' 
prepare,  so  that  in  the  line  as  a  whole  regular  terms  may  be 
said  to  be  1  per  cent  10  days,  net  30  days.  The  formal 
recommendation  of  terms  has  been  supplemented  in  most 
cases  by  the  preparation  of  monthly  reports  of  outstandings 
of  the  kind  referred  to  above. 


RELATION  TO  BUSINESS  CONDITIONS     105 

In  the  case  of  some  other  leading  wholesale  lines,  little 
consideration  is  given  to  the  classification  of  individual 
items,  but  attention  is  concentrated  rather  upon  the  general 
terms.  Where  this  is  done,  the  problem  is  simplified 
greatly,  at  least  as  far  as  the  preparation  of  formal  terms 
is  concerned.  Accordingly,  too,  it  is  possible  to  prepare 
terms  for  use  on  a  national  scale,  and  this  has  always  been 
done,  for  example,  by  the  National  Hardware  Association. 
In  that  industry,  however,  territorial  terms  have  also  been 
recommended  by  the  southern  and  Texas  associations.  In 
other  lines  practice  differs.  The  Southern  "Wholesale  Dry 
Goods  Association  has  recommended  terms  applicable  to  its 
section,  but  the  National  Wholesale  Dry  Goods  Association, 
whose  membership  is  confined  more  largelj'^  to  the  north, 
has  never  formally  recommended  terms.  It  has,  however, 
had  its  secretary  compile  the  terms  in  use  by  the  member- 
ship, and  the  same  is  true  of  other  bodies,  such  as  the 
National  Wholesale  Jewelers'  Association. 

Characteristic  only  of  wholesalers  as  contrasted  with 
manufacturers,  is  activity  with  respect  to  the  terms  upon 
which  merchandise  is  purchased,  in  particular  the  discounts 
allowed.  The  leading  associations  have  had  committees 
for  many  years  whose  primary  interest  is  in  this  matter. 
The  committee  of  the  National  Wholesale  Grocers'  Associa- 
tion dates  back  to  1907,  the  year  after  the  association  was 
founded.  The  officers  of  the  National  Hardware  Associa- 
tion for  many  years  gave  attention  to  the  subject,  and  the 
importance  of  the  question  at  one  time  in  the  90 's  was 
indicated  above.  Since  about  1910,  special  committees  of 
the  association  have  been  appointed  as  occasion  has  de- 
manded. The  several  divisions  of  the  National  Wholesale 
Dry  Goods  Association  have  regularly  communicated  with 
manufacturers  whose  discounts  were  unsatisfactory,  while 
for  several  years  the  Southern  Wholesale  Dry  Goods  Asso- 
ciation had  a  regular  committee  to  deal  with  the  matter 


106    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

and  to  seek  to  obtain  uniform  terms  on  all  items  which  the 
members  purchased.  On  the  other  hand,  in  the  boot  and 
shoe  industry,  where  the  manufacturers  distribute  about 
40  per  cent  of  the  output  direct  to  retailers,  in  part  through 
their  own  jobbing  houses,  and  where  certain  of  them  also 
distribute  goods  from  other  factories  as  well  as  their  own, 
activity  with  respect  to  buying  terms  has  been  confined 
largely  to  rubber  and  tennis  footwear,  which  is  produced 
by  different  manufacturers. 

A  good  idea  of  the  scope  of  the  activities  of  such  bodies 
along  these  lines  is  afforded  by  the  National  Wholesale 
Grocers'  Association.  In  1915  the  chairman  of  the  associa- 
tion's Discount  for  Cash  Committee  stated  that  the  subject 
of  increased  discount  for  cash  had  been  submitted  to  every 
known  firm  or  corporation  soliciting  the  wholesale  grocery 
trade.  Not  only  have  the  association's  activities  covered  a 
wide  field,  but  they  have  included  smaller  as  well  as  greater 
changes  in  discounts.  To  take  a  couple  of  illustrations  at 
random,  as  a  result  of  their  acti\dties,  sugar  refiners  in 
1911,  in  general,  increased  their  discount  from  1  per  cent 
to  2  per  cent,  while  in  1919  the  rice  contract  called  for  a 
1  per  cent  discount  in  place  of  the  1/2  per  cent  previously 
allowed.  In  the  course  of  its  work,  the  Discount  for  Cash 
Committee  has  at  various  times  also  called  attention  to  the 
need  for  members  to  respect  the  cash  discount  period. 

Buying  and  SeUing  Terms  of  Wholesalers. — ^But  why 
all  this  interest  on  the  part  of  the  wholesaler  in  terms? 
The  answer  is  not  far  to  seek.  On  the  one  hand,  it  relates 
to  the  question  of  pricing  his  goods  for  resale ;  on  the  other 
hand,  to  the  question  of  the  profits  which  he  receives. 

The  point  of  primary  importance  with  respect  to  the 
terms  upon  which  he  purchases  is  the  size  of  the  cash  dis- 
count which  he  receives.  While  the  net  terms  to  the  retailer 
are  based  on  the  retailer's  marketing  period,  and  a  large 
part  of  the  retailers  take  the  full  net  terms,  the  wholesaler 


RELATION  TO  BUSINESS  CONDITIONS     107 

is  presumed  to  bear  the  financing  burden  himself,  and  to 
pay  cash  for  his  merchandise.  At  the  same  time  that  he 
thus  discounts  his  bills,  he  grants  time  to  the  retailer  to 
whom  he  sells.  The  length  of  the  net  terms  which  he  grants 
depends  upon  the  size  of  the  cash  discount  which  he 
receives.  This  is  not  true  in  the  sense  that  he  disposes  of 
the  goods  as  soon  as  sold,  so  that,  say,  a  2  per  cent  discount 
which  he  receives  corresponds  to  the  net  60  days  which  the 
buyer  receives,  because  he  actually  carries  the  merchandise 
himself  for  some  time.  It  means  rather  that  when  he  dpes 
this  he  can  fix  the  price  to  the  retailer  on  the  basis  of  the 
net  price  which  he  himself  is  quoted.  This  was  definitely 
assigned  as  a  partial  reason  for  the  hardware  wholesalers' 
opposition  to  the  decrease  in  the  discount  on  bolts  and  nuts 
from  2  per  cent  to  1  per  cent. 

The  above  discussion  assumes  that  buying  and  selling 
terms  are  the  same.  This  is  not,  however,  by  any  means 
universally  conceded,  and  there  is  a  great  mass  of  contro- 
versy about  the  relation  between  the  two.  But  at  least  one 
point  of  agreement  exists.  A  cardinal  principle,  it  is  held, 
is  that  the  discount  allowed  on  sales  should  never  be  greater 
than  the  discount  which  is  received  on  purchases.  Further 
than  this,  however,  there  are  two  theories.  One  is  that  the 
discounts  in  the  two  cases  should  be  equal.  This  theory  is 
held  in  various  lines,  such  as  hardware.  On  the  other  hand, 
in  certain  lines  a  greater  discount  is  desired  on  purchases 
than  is  received  on  sales.  Take  the  grocery  business,  for 
instance.  The  National  Wholesale  Grocers'  Association 
desires  to  obtain  a  2  per  cent  discount,  although  standard 
selling  terms  are  1  per  cent  10  days,  net  30  days.  Approxi- 
mately 50  per  cent  of  retail  grocers  discount  their  bills, 
and  accordingly  there  is  a  differential  of  1  1/2  per  cent 
accruing  to  the  wholesaler.  One-half  per  cent  of  this 
presumably  offsets  the  credit  work  and  credit  risk  and  the 
interest  involved  in  carrying  the  accounts  which  do  not 


108    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

discount,  leaving  a  profit  of  1  per  cent.  It  is  generally 
held  that  firms  in  the  grocery  line  which  do  not  take  ad- 
vantage of  the  cash  discount  are  not  in  position  to  make 
a  net  return  on  the  funds  invested.  On  the  other  hand, 
it  should  be  noted  that  certain  wholesale  grocers  believe 
that  the  average  discounts  received  are  only  about  1  1/2 
per  cent  and  that  the  average  discounts  granted  are  about 
the  same.  In  the  hardware  industry,  where  the  theory  of 
equalization  obtains,  a  differential  (over  1  per  cent,  as  only 
40  to  50  per  cent  of  the  accounts  are  discounted)  •'  is  like- 
wise obtained  but  this  should  theoretically  be  entirely  offset 
by  the  credit  risk  and  credit  work,  as  well  as  the  interest 
involved  in  carrying  those  accounts  which  do  not  discount. 

Intimately  related  to  the  question  just  considered,  is  the 
question  of  the  relation  which  the  amount  of  the  discount 
received  by  the  wholesaler  bears  to  the  net  profits  which  he 
makes.  It  is  often  stated  that  the  amount  of  the  discount 
equals  the  net  profits  of  the  wholesaler,  or  at  least  a  con- 
siderable part  of  them."  In  some  eases,  perhaps,  over- 
emphasis has  been  placed  on  the  importance  of  the  discount 
in  this  connection,  though  it  is  true  that  the  wholesaler 
necessarily  works  upon  a  narrow  margin  of  profit.  Where 
the  size  of  the  discount  from  the  manufacturer  is  increased, 
say,  1/2  per  cent,  wholesalers  are  generally  urged  not  to 
push  competition  so  far  as  to  pass  the  discount  on  to  the 
retailers,  but  instead  to  add  it  to  their  own  profits.  Little 
exact  information  as  to  the  amount  of  the  margin  of  net 

^  Some  information  as  to  the  promptness  with  which  hardware 
retailers  pay  their  bills  is  contained  in  an  address  advocating  the 
use  of  the  trade  acceptance,  read  by  Mr.  E,  H.  Treman  at  the  1916 
Convention  of  the  National  Hardware  Association  and  reproduced 
in  the  pamphlet  entitled  '  *  Trade  Acceptances, ' '  What  They  Are  and 
How  They  Are  Used,"  prepared  for  the  American  Acceptance  Coun- 
cil, and  published  October  1,  1919. 

"  See  an  address  of  Mr.  Geo.  E.  Liehty  on  ' '  Discount  for  Cash ; 
Why  is  it  to  Manufacturers'  Best  Interest,"  before  the  National 
Wholesale  Grocers'  Association,  1916,  Proceedings,  pp.  192-196. 


RELATION  TO  BUSINESS  CONDITIONS      109 

profit  is  available,  but  in  the  hardware  industry  in  1919, 
for  example,  it  was  stated  that  the  amount  in  that  industry 
was  usually  estimated  at  2  1/2  to  3  1/2  per  cent  of  net 
sales,  and  was  higher  during  the  war,  although  for  a  longer 
period  of  years  it  averaged  well  under  2  per  cent. 


PART  II 
THE  TRADE  ACCEPTANCE  QUESTION 


CHAPTER  VII 

THE  TRADE  ACCEPTANCE   MOVEMENT   IN   THE  UNITED   STATES 

Part  II  has  as  it.s  central  purpose  a  critical  study  of 
the  suggestions  which  have  been  made  for  reforming  the 
commercial  credit  system  of  the  United  States  by  advocates 
of  the  trade  acceptance.  This  involves  a  consideration  of 
the  elements  of  strength  and  weakness  in  both  systems,  and 
raises  a  host  of  questions.  Before  drawing  a  contrast  be- 
tween the  two  systems,  and  considering  the  desirability  of 
each,  however,  it  will  be  desirable  to  obtain  a  more  complete 
and  unified  view  of  the  status  and  extent  of  use  of  the  trade 
acceptance  than  has  been  afforded  by  the  previous  dis- 
cussion. It  will  likewise  be  desirable  to  consider  the  growth 
of  the  instrument  since  its  inception,  as  this  will  also  throw 
considerable  light  upon  the  questions  of  principle  which 
will  be  considered  later.  The  present  chapter  will  therefore 
be  devoted  to  a  consideration  of  the  trade  acceptance 
movement,  and  will  be  followed  by  a  chapter  giving  the 
results  of  the  surveys  which  have  been  made  of  the  use  of 
the  trade  acceptance. 

Meaning  of  the  Trade  Acceptance. — The  trade  accept- 
ance has  been  variously  defined.  Among  the  best  definitions 
is  that  of  Mr.  R.  H.  Treman,  as  follows  :^ 

A  trade  acceptance  is  a  time  draft  drawn  by  the  seller  of  mer- 
chandise on  the  buyer  for  the  purchase  price  of  the  goods  and 
accepted  by  the  buyer,  payable  on  a  certain  date,  at  a  certain 
place  designated  on  its  face. 


'"Trade  Acceptances,  What  They  Are  and  How  They  Are  Used," 
published  by  the  American  Acceptance  Council,  October  1,  1919. 

113 


n4  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

A  shorter,  but  substantially  similar  definition,  stressing 
the  point  of  view  of  the  buyer-acceptor,  is  stated  by  Mr. 
Oliver  J.  Sands,  as  follows  :- 

An  acceptance  is  an  acknowledgment  of  the  receipt  of  goods ' 
and  a  promise  to  pay  for  the  same  at  a  fixed  date  and  place. 

Both  of  these  definitions,  it  will  be  observed,  include  the 
same  general  features,  which  serve  to  distinguisli  the  trade 
acceptance  from  other  kinds  of  paper.  Fundamentally  it 
is  an  order  to  paj'^  which  is  accepted  by  the  drawee.  This 
feature  serves  to  give  the  paper  its  distinctive  form.  Sup- 
plementary to  this,  but  no  less  essential,  is  the  fact  that  it 
arises  out  of  a  specific  merchandise  transaction  or  series  of 
transactions,  and  that  this  fact,  although  not  the  details, 
is  indicated  on  its  face.  This  serves  to  make  the  paper  a 
trade  acceptance,  instead  of  merely  an  acceptance.  These 
two  features  mark  the  difference  between  the  trade  accep- 
tance and  the  ordinary  promissory  note,  which  is  merely  a 
promise  to  pay,  and  totally  unrelated  to  any  specific 
transactions,  giving  no  inkling  of  the  purpose  for  which 
the  credit  is  extended.  Added  to  these  two  features  are 
others  which  serve  to  establish  the  negotiable  character  of 
the  instrument,  etc. 

Various  forms  of  trade  acceptance  have  been  devised  by 
different  agencies  and  organizations,  and  are  now  in  use. 
Among  the  most  widespread  are  those  of  the  American 
Trade  Acceptance  Council  (later  the  American  Acceptance 
Council)   and  the  National  Association  of  Credit  Men. 

The  Trade  Acceptance  Before  and  After  the  Civil  War. 
— The  trade  acceptance  is  by  no  means  a  recent  innovation. 
It  was  already  in  considerable  use,  and,  together  with  the 
))romissory  note,  formed  the  basis  of  the  commercial  credit 
system  prior  to  the  Civil  War.     This  conflict  marked  the 

"  Presented    at    the    meeting    of    the    Aniericfin    Trade    Acceptance 
Council  at  New  York  on  Noveml)er  23,  1917. 
'  By  implication  only. 


TRADE  ACCEPTANCE  MOVEMENT   IN  U.  S.    Ho 

beginning  of  a  revolution  in  credit  practice.  The  excessive 
issues  of  greenbacks  helped  to  make  uncertain  the  value 
of  credit  instruments  which  ran  for  any  considerable  length 
of  time,  while  the  market  for  merchandise  widened,  and 
changed  from  a  primarily  local  one  to  one  on  a  more 
national  scale.  Sellers,  therefore,  endeavored  to  bring  busi- 
ness as  nearl}'  as  possible  to  a  cash  basis,  and  were  aided 
by  the  fact  that  the  demand  for  goods  tended  to  outrun  the 
supply.  In  the  80 's  there  developed  the  practice  of  selling 
goods  by  sample,  instead  of  by  personal  selection  from  an 
accumulated  stock.  As  a  result,  the  doctrine  of  ''implied 
warranties,"  as  it  has  been  termed,  arose,  and  the  risk 
and  responsibility  of  delivery  was  laid  upon  the  seller.  This 
led  to  the  use  of  the  open  account,  which,  in  turn,  led  sellers 
to  offer  cash  discounts  in  order  to  stimulate  payment. 
Gradually,  the  cash-discount  open-account  system,  as  we 
know  it  to-day,  grew  up  and  was  extended  to  cover  almost 
all  parts  of  the  commercial  credit  field. 

The  Trade  Acceptance  and  the  Federal  Eeserve  Act. — 
The  history  of  the  recent  trade  acceptance  movement  in 
the  United  States  falls  naturally  into  3  stages:  (1)  a 
period  of  gradual  progress,  from  the  passage  of  the  Federal 
Reserve  Act  until  the  autumn  of  1917;  (2)  a  war  period 
in  which  an  active  campaign  was  carried  on  to  extend  the 
use  of  the  acceptance,  under  the  auspices  of  a  special 
organization,  the  American  Trade  Acceptance  Council, 
formed  at  tlie  opening  of  the  period;  and  (3)  a  post-war 
period,  dating  from  about  the  end  of  1919,  at  the  opening 
of  which  friends  and  foes  alike  called  attention  to  abuses 
in  trade  acceptance  practice  by  some  users  of  the  in- 
strument, and  during  which  the  American  Acceptance 
Council  (successor  to  the  American  Trade  Acceptance 
Council)  shifted  its  chief  attention  to  the  bankers'  accept- 
ance. 

Just  as  the  inauguration  of  the  National  Banking  System 


116   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

during  the  Civil  "War  marked  the  beginning  of  a  new  epoch 
in  American  banking,  so  the  passage  of  the  Federal  Reserve 
Act  also  marked  the  begining  of  another  epoch.  The  Act, 
too,  contained  certain  provisions  which  were  highly  signifi- 
cant from  a  credit  point  of  view.  Among  these,  none  is 
more  important  for  the  present  question  than  the  require- 
ments which  the  Federal  Reserve  System  lays  down  as  to 
paper  which  it  will  accept  for  rediscount  or  purchase — 
in  other  words,  its  definition  of  "eligible"  paper.  This 
definition  obviously  will  largely  determine  the  type  of 
paper  which  is  created,  because  business  men  will  create 
just  such  paper  in  order  that  it  may  possess  the  rediscount 
privilege.  The  definition  might  therefore  profoundly  in- 
fluence American  mercantile  credit  practice  if  attempt 
were  made  to  introduce  innovations  into  the  existing  sys- 
tem. This  question,  Willis  tells  us,*  was  specifically 
considered  when  the  Act  Avas  being  framed,  and  a  proposal 
was  made  to  confine  the  eligible  and  discountable  paper  to 
that  which  bore  two  names,  those  of  buyer  and  seller,  but 
this  plan  was  rejected.  The  Act  itself  is  not  specific,  but 
after  admitting  promissory  notes  as  well  as  drafts,  gives 
the  Federal  Reserve  Board  wide  latitude  in  prescribing 
precisely  what  paper  is  eligible.  Section  13  of  the  Federal 
Reserve  Act  reads  in  part  as  follows: 

.  .  .  Any  Federal  Reserve  bank  may  discount  notes,  drafts,  andi 
bills  of  exchange  arising  out  of  actual  commercial  transactions; 
that  is,  notes,  drafts  and  bills  of  exchange  issued  or  drawn  foi^ 
agricultural,  industrial,  or  commercial  purposes,  or  the  proceed^ 
of  which  have  been  used,  or  are  to  be  used,  for  such  purposes,  the 
Federal  Reserve  Board  to  have  the  right  to  detennine  or  define 
the  character  of  the  paper  thus  eligible  for  discount,  within  th© 
meaning  of  this  act. 

This  applies  to  paper  which  a  Federal  Reserve  Bank  may 
rediscount  for  its  member  banks.     Supplementary  to  this 

*Thc  Federal  Reserve  (New  York,  1915),  p.  186. 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    117 

is  Section  14,  which  in  part  refers  to  paper  whieh  a  Fed- 
eral Reserve  Bank  may  purchase  in  the  open  market,  as 
follows : 

Any  Federal  Reserve  bank  may,  under  rules  and  regnlations 
prescribed  by  the  Federal  Reserve  Board,  purchase  and  sell  in  the 
open  market,  at  home  or  abroad,  either  from  or  to  domestic  or 
foreign  banks,  firms,  corporations  or  individuals,  .  .  .  bills  of 
exehang-e  of  the  kinds  and  maturities  by  this  act  made  eligible 
for  rediscount,  with  or  without  the  endorsement  of  a  member 
bank. 

It  is  thus  evident  that  bills  of  exchange,  or  trade  accept- 
ances, have  a  wider  access  to  the  Federal  Reserve  Banks 
than  do  notes,  as  the  latter  may  merely  be  rediscounted 
and  are  not  eligible  for  purchase  in  the  open  market.  Al- 
though the  Act  as  originally  framed  included  notes,  and 
thus  placed  open  market  transactions  upon  the  same  basis 
as  discount  transactions,  this  provision  was  specifically 
omitted  after  due  consideration.^  It  was  held  that  the 
purchase  of  such  single  name  paper  might  expose  the  Fed- 
eral Reserve  Banks  to  some  hazard,  for  they  would  not  be  in 
as  good  a  position  to  judge  the  paper  as  the  member  banks 
themselves,  and  therefore  might  from  time  to  time  take 
paper  which  was  not  thoroughly  satisfactory.  While  the 
paper  would  be  protected  by  the  endorsement  of  a  member 
bank  in  the  case  of  a  discount,  this  would  not  be  required 
in  an  open  market  transaction,  and  hence  this  protection 
would  be  lacking. 

Work  of  the  Federal  Reserve  Board. — In  accordance 
with  the  provisions  of  sections  13  and  14,  the  Federal 
Reserve  Board  proceeded  in  due  course  to  prepare  and 
issue  a  regulation  defining  the  character  of  paper  eligible. 
In  February,  1914,  the  Reserve  Bank  Organization  Com- 
mittee requested  various  clearing  houses,  chambers  of 
commerce  and  other  associations  to  submit  definitions  of 

'Willis,  p.   184. 


118    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

"commercial  paper. "^  The  replies  received  were  exceed- 
ingly diverse.  While  some  bodies,  such  as  the  New  York 
Clearing  House  Association,  favored  two  name  paper, 
others,  such  as  the  Merchants  Association  of  New  York, 
urged  that  single  name  paper  be  accepted  for  rediscount. 
The  Board  accordingly  declared  in  Circular  No.  13,  dated 
November  10,  1914  (as  well  as  previously  in  Circular  No. 
8,  dated  October  17,  1914)  that  "it  would  be  inadvisable 
at  this  time  to  issue  regulations  placing  a  narrow  or  re- 
stricted interpretation  upon  the  section  defining  the 
character  of  paper  eligible  for  discount,"  and  decided 
"to  admit  both  forms  to  rediscount  with  the  Federal  Re- 
serve Banks." 

Whereas  under  this  circular  both  classes  of  paper  were 
admitted  to  rediscount  at  Federal  Reserve  Banks  without 
distinguishing  between  them,  the  following  year  a  separate 
class  of  trade  acceptance  was  recognized,  and  a  special 
regulation  (P,  Series  of  1915,  dated  July  15,  1915)  was 
issued  governing  its  rediscount.  Circular  No.  16,  Series 
of  1915,  which  accompanied  the  regulation,  employed  the 
term  "trade  acceptances,"  and  explained  that  it  was  to 
deal  with  them  as  a  distinct  class  of  commercial  paper, 

for  which  the  Board  is  ready  to  approve  the  establishment  of  a 
discount  rate  somewhat  lower  than  that  applicable  to  other  com- 
mercial paper.  ...  In  promulgating  it,  the  Board  expresses 
the  belief  that  it  will  considerably  enlarge  the  scope  of  service 
of  Federal  Reserve  Banks,  and,  incidentally,  assist  in  developing 
a  class  of  double-name  paper,  which  has  shown  itself  in  so 
many  countries  a  desirable  form  of  investment  and  an  important 
factor  in  modern  commercial  banking  systems. 

In  accordance  therewith,  separate  rates  for  trade  accep- 
tances were  inaugurated  at  the  several  Federal  Reserve 
Banks,  commencing  with  the  Federal  Reserve  Bank  of  New 

°  E.  E.  Agger,  ' '  The  Commercial  Paper  Debate, ' '  Journal  of  Po- 
litical Economy,  Vol.  22,  1914.  O.  M,  W.  Spragne,  "Commerci&l 
Paper  and  the  Federal  Keserve  Banks,"  ibid.,  contains  an  excellent 
discuasion  of  principles. 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.   119 

York  on  July  22.  The  Chicago  and  Minneapolis  banks, 
however,  had  made  no  distinction  by  January  1,  1916,  and 
the  same  rates  remained  in  force  in  these  districts  as  had 
been  inaugurated  for  all  classes  of  paper  in  November,  1914. 
These  two  banks  only  inaugurated  special  rates  in  Novem- 
ber and  March,  1916,  respectively.  The  rates  established 
on  trade  acceptances  generally  were  from  1/2  to  1  per  cent 
below  those  on  regular  paper,  and  thus  gave  them  a 
preferential  rate.  When  war  financing  commenced  in  1917, 
the  rates  on  trade  acceptances  in  some  districts  were  the 
same  as  on  paper  secured  by  Government  war  obligations. 
At  the  middle  of  1917 'this  was  the  case  ^vith  6  of  the  12 
banks,  but  on  January  1,  1918,  it  was  true  of  only  3  banks. 

Efforts  were  actively  made  bj'  the  Board  and  the  Federal 
Reser\'e  Banks  to  further  the  use  of  the  trade  acceptance. 
Several  of  the  Board  members,  as  well  as  the  secretary, 
addressed  trade  associations  and  other  bodies  of  business 
men  and  pointed  out  the  advantages  which,  it  was  believed, 
would  accrue  from  the  introduction  of  the  new  instru- 
ment.'^  Several  of  the  members  of  the  board,  notably  Mr. 
P.  M.  Warburg,  were  strong  advocates  of  it,  as  were  also 
certain  of  the  leading  officers  of  some  of  the  individual 
Federal  Reserve  Banks,  notably  Mr.  D.  C.  Wills,  Federal 
Reserve  Agent  at  Cleveland,  and  Mr.  R.  H.  Treman,  Deputy 
Governor  of  the  Federal  Reserve  Bank  of  New  York.^  A 
committee  of  Federal  Reserve  Agents,  consisting  of  Messrs. 
Wills,  Curtiss  (Boston),  Jay  (New  York)  and  Ramsey 
(Dallas)  reported  to  a  conference  of  Federal  Reserve 
Agents  held  in  December,  1916,  that  the  development  of 
the  trade  acceptance  plan  "should  be  part  of  any  general 
publicity  scheme,  if  such  action  should  be  taken  by  the 


'  For  example,  address  of  H,  Parker  Willis  before  the  Second 
National  Silk  Convention  at  Paterson,  N.  J.,  November  22,  1916. 

•  In  addition  to  Mr.  Treman 's  other  viritings,  reference  should  be 
made  to  his  pamphlet  entitled  "Trade  Acceptances"  (August,  1917). 


120   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

conference  and  approved  by  the  Board,"  but  this  was  not 
done.  The  committee  also  recommended  that  each  Federal 
Reserve  Bank  secure  standard  trade  acceptance  forms  and 
supply  them  to  member  banks,  accompanied  by  a  circular 
explaining  their  advantages,  and  this  step  was  taken  by 
some  of  the  banks.^ 

The  Trade  Acceptance  Movement — The  National  Asso- 
ciation of  Credit  Men. — During  what  has  been  termed 
above  the  first  period  of  trade  acceptance  history,  the 
movement,  however,  centered  around  the  activities  of  the 
National  Association  of  Credit  Men,  Certain  of  its  officers 
had  from  the  outset  displayed  an  active  interest  in  the 
acceptance,  and  had  already  urged  Congress  at  the  time 
the  Federal  Reserve  Act  was  being  framed,  to  give  prefer- 
ence to  the  accepted  draft.  The  Association  for  some  years 
has  adopted  resolutions  at  its  annual  conventions  endorsing 
the  trade  acceptance  and  favoring  its  wide  use.  It  further- 
more early  adopted  the  policy  of  actively  bringing  the 
acceptance  to  the  attention  of  business  houses  and  of 
endeavoring  to  enlarge  the  circle  of  users.  At  the  close 
of  1915,  it  was  officially  stated  that  the  Association  had 
instituted  "a  campaign  with  a  view  to  persuading  the 
business  interests  of  the  country  to  use  the  trade  acceptance 
in  place  of  open  book  accounts."  In  framing  its  plan, 
it  consulted  with  various  authorities,  such  as  the  vice- 
chairman  of  the  Federal  Trade  Commission  and  the  secre- 
tary of  the  Federal  Reserve  Board,  and  asked  the  Federal 
Reserve  Bank  of  New  York  to  recommend  a  form  of  trade 
acceptance.  In  addition  to  considering  the  acceptance  at 
its  own  annual  conventions,  the  Association  held  a  number 


""What  are  the  advantages  of  trade  acceptances?  To  the  seller? 
To  the  purchaser?  To  the  baaker?"  Federal  Eeserve  Bank  of 
Minneapolis,  January,  1917. 

John  U.  Calkins,  Deputy  Governor,  Federal  Reserve  Bank  of  San 
Francisco,  address  at  a  meeting  of  Tacoma  Credit  Men's  Association, 
June  2,  1916. 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.   121 

of  special  conferences  devoted  exclusively  to  the  instrument, 
such  as  in  New  York,  March  9,  1917,  and  held  several  in 
cooperation  with  other  more  or  less  closely  related  bodies, 
such  as  at  Buffalo,  March  11,  1918.  The  monthly  Bulletin 
of  the  Association  (succeeded  April,  1920,  by  the  Credit 
Monthly),  regularly  contained  items  of  interest,  frequently 
giving  the  experience  of  firms  which  had  used  the  accept- 
ance, and  often  grouping  such  items  under  some  distinctive 
heading,  such  as  Trade  Acceptance  Brevities  or  Trade 
Acceptance  Department.  Officials  of  the  Association  ad- 
dressed trade  associations  and  other  bodies  of  business 
men,  while  literature  was  prepared  and  distributed.  In 
March,  1917,  a  Trade  Acceptance  Bureau  was  installed  in 
the  national  offices  of  the  Association  at  New  York,  whose 
particular  function  it  was  to  prepare  and  distribute  litera- 
ture relative  to  the  instrument,  and  serve  as  a  source  of 
information  concerning  it.  It  was  active  along  these  lines 
until  the  Spring  of  1919,  when  the  American  Acceptance 
Council  was  created. 

During  the  early  years  appeals  to  the  business  man  to 
use  the  trade  acceptance  were  based  upon  the  superior 
advantages  which  it  was  claimed  the  instrument  possessed. 
"With  the  advent  of  the  war,  this  was  re-enforced  by  an 
appeal  to  patriotism.  The  resolutions  adopted  at  the  1918 
convention  emphasized  the  service  which  it  was  believed 
the  acceptance  might  render  during  such  a  period  of 
stress : 

Resolved,  That  the  National  Association  of  Credit  Men,  in  con- 
vention assembled,  records  again  its  firm  belief  in  the  Trade 
Acceptance,  as  a  credit  instrument  superior  to  the  open  book 
account  in  utility,  protection  and  value,  and  furnishing  the  basis 
of  a  more  liquid  and  flexible  medium  of  exchange  in  mercantile 
transactions;  furthermore,  releasing  capital  that  could  be  utilized 
to  advantage  in  normal  time  and  that  may  become  pressing  neces- 
sity under  war  conditions,  when  the  credit  functions  of  the  nation 
will  receive  their  severest  test;  nothing  should  be  left  undone  or 


122    THE  MECHANISM  OP  COMMERCIAL  CREDIT 

Delected  that  may  contribute  to  the  nation's  powers  for  the  win- 
ning of  a  victory  in  the  struggle  for  world  independence,  and  the 
trade  acceptance  is  clearly  an  instrument  that  will  help  to  that  end. 

"Whereas,  it  is  of  the  utmost  importance  at  this  critical  junc- 
tion in  our  financial  affairs  that  we  make  full  use  of  every  legiti- 
mate credit  instrument,  and 

Whereas,  in  the  inevitable  expansion  of  credit  incident  to  the 
growing  demands  of  war,  it  is  of  the  utmost  importance  that  we 
create  not  only  credit  instruments  that  are  eligible  for  rediscount 
at  Federal  Reserve  Banks,  but  instruments  of  the  widest  market- 
ability, qualities  which,  as  leading  financial  authorities  state,  are 
present  in  the  highest  degree  in  acceptances : 

Be  it  Resolved,  That  the  National  Association  of  Credit  ]\leu 
continue  to  extend  its  powers  to  bring  about  a  better  understand- 
ing of  the  trade  acceptance  and  to  advuse,  so  far  as  may  be,  its 
use  in  the  various  lines  of  trade  as  contemplated  in  the  Federal 
Reserve  Act,  as  interpreted  by  the  Federal  Reserve  Board. 


The  American  Trade  Acceptance  Council. — With  the 
advent  of  the  war,  the  acceptance  movement  entered  upon 
a  second  stage,  during  which  a  campaign,  more  active  and 
more  highly  organized  than  previously,  was  carried  on  to 
extend  its  use.  The  initial  step  was  taken  at  the  War 
Convention  of  American  Business  held  in  Atlantic  City, 
September  17-21,  1917,  under  the  joint  auspices  of  the 
Chamber  of  Commerce  of  the  United  States,  the  American 
Bankers'  Association  and  the  National  Association  of 
Credit  Men.  The  acceptance  was  discussed  at  the  con- 
vention and  a  joint  committee  on  trade  acceptances  was 
appointed,  consisting  of  three  members  from  each  associa- 
tion, to  "consider  the  development  of  the  trade  acceptance 
as  a  device  for  strengthening  and  mobilizing  commercial 
credit,  and  to  serve  as  a  permanent  center  for  the  direction 
of  a  nation-wide  educational  campaign  in  tlie  interest  of 
the  Trade  Acceptance."  At  a  subsequent  meeting  in  New 
York  on  October  9th,  a  permanent  organization   was  ef- 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    123 

fected,  which  was  to  be  known  as  the  American  Trade 
Acceptance  Council.  The  following  were  the  principal 
officers :  Mr.  Lewis  E.  Pierson,  Chairman  of  the  Board, 
Irving  National  Bank,  New  York,  Chairman;  Mr.  R.  H. 
Treman,  Deputy  Governor,  Federal  Reserve  Bank  of  New 
York,  Vice-Chairman;  Mr.  J.  H.  Tregoe,  Secretary-Treas- 
urer, National  Association  of  Credit  Men,  Secretary;  and 
iMr.  W.  W.  Orr,  Assistant  Secretary-Treasurer  of  the 
Association,  Assistant  Secretary.  Mr.  Jerome  Thralls,  sec- 
retary of  the  clearing  house  and  later  of  the  national  bank 
sections  of  the  American  Bankers'  Association,  was  shortly 
also  appointed  Assistant  Secretary,  Several  committees 
were  appointed,  and  regular  offices  opened  in  the  Wool- 
worth  Building,  New  York.  Somewhat  later  the  Council 
was  enlarged  to  include  representatives  from  the  National 
Association  of  Manufacturers. 

On  the  whole,  the  work  of  the  American  Trade  Accept- 
ance Council  represented  an  intensive  effort  along  the  lines 
already  laid  out  by  the  National  Association  of  Credit 
Men.^°  The  Council  became  the  center  of  the  movement. 
It  developed  standard  trade  acceptance  forms,  which  were 
approved  by  the  Federal  Reserve  Board,  the  General 
Counsel  of  the  American  Bankers'  Association  and  other 
authorities.  It  held  frequent  meetings,  the  New  York 
members  gathering  weekly.  It  held  a  regular  annual  con- 
vention at  Chicago  on  June  17,  1918,  the  day  before  the 
convention  of  the  National  Association  of  Credit  Men,  after 
having  held  several  conferences  at  New  York  and  Phila- 
delphia. It  was  said  that  over  800  were  in  attendance  at 
the  Chicago  Convention  and  no  less  than  600  were  in  the 
room  at  any  one  time.  In  perfecting  its  organization,  state 
trade  acceptance  councils  or  committees  were  formed  in 

"The  Report  of  the  Trade  Acceptance  Committee  of  the  American 
Bankers'  Association  at  the  1918  convention  described  fully  the  work 
of   the   Council. 


124   THE  M:ECHANISM  OP  C0M3IERCIAL  CREDIT 

various  states,  for  example,  Michigan  in  Mareh,  1918,  and 
Maryland  in  April,  1918,  and  local  councils  were  formed 
in  various  centers,  being  in  operation  by  the  fall  of  1918 
at  least  in  Rochester,  Milwaukee  and  Indianapolis.  The 
Council  had  a  speakers'  bureau,  which  was  active  in 
addressing  trade  organizations  and  other  bodies  with  a  view 
to  having  them  endorse  the  trade  acceptance,  and  regular 
sets  of  resolutions  were  prepared  at  the  close  of  1917,  for 
the  use  of  these  associations.  The  council  undertook  to 
furnish  material  to  its  committees,  to  financial  and  trade 
periodicals  and  to  the  general  press.  In  addition,  it  pub- 
lished a  series  of  pamphlets,^^  and  Mr.  Thralls  issued  weekly 
from  the  American  Bankers'  Association  offices  a  Trade 
Acceptance  Service  Bulletin  which  was  distributed  to  not 
only  700  banker  committeemen,  but,  in  addition,  to  1,000 
others  representing  various  lines  of  business  and  the  press. 
It  also  engaged  in  several  other  allied  lines  of  work,  such 
as  advocating  that  savings  bank  investment  laws  be 
amended  so  as  to  permit  the  purchase  of  prime  trade 
acceptances,  and  meeting  with  a  committee  which  consid- 
ered the  use  of  acceptances  in  cotton  financing  at  New  York 
in  the  Spring  of  1918. 

Work  of  the  Bankers. — By  means  of  the  American  Trade 
Acceptance  Council,  the  advocates  of  the  trade  acceptance 
succeeded  in  enlisting  the  aid  not  only  of  the  Chamber  of 
Commerce,  but  also  of  the  American  Bankers'  Association. 
"While  several  bankers,  notably  Mr.  C.  W.  Dupuis  of  Cin- 
cinnati and  Mr.  George  Woodruff  of  Joliet,  Illinois,  in 
addition  to  those  already  mentioned,  had  been  enthusiastic 
advocates  of  the  trade  acceptance,  and  a  number  of  banks, 
particularly  in  the  larger  centers,  such  as  New  York,  had 

"  These  include : 

"Trade  Acceptances,  What  They  Are  and  How  They  Are  Used," 
by  Robert  H.  Treman. 

"Trade  Acceptance  Catechism,"  by  J.  T.  Holdsworth. 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    125 

prepared  and  distributed  pamphlets  explaining  its  use," 
the  bankers  on  the  whole  had  held  back.  When  the  question 
was  first  considered,  Mr.  James  B.  Forgan,  president  and 
later  chairman  of  the  First  National  Bank  of  Chicago,  had 
been  a  strong  upholder  of  the  prevailing  cash  discount- 
open  account  system  as  opposed  to  the  trade  acceptance, 
as  was  also  the  late  Mr.  James  G.  Cannon,  president  of 
the  Fourth  National  Bank  of  New  York.  Mr.  W.  W. 
Orr  in  1917  WTote  as  follows: 

"We  have  met  with  much  difficulty  in  the  attitude  of  some  banks, 
particularly  those  in  smaller  centers,  some  of  them  indifferent  and 
without  information  as  to  the  acceptance  and  its  advantages  for 
them  (the  banks),  over  the  ordinary  promissory  note,  and  others 
definitely  opposed  to  the  new  system. 

Mr.  Beverly  D.  Harris,  quoting  Mr,  Orr  at  the  American 
Bankers'  Association  Convention  in  1917,  stated  that  this 
was  borne  out  by  his  own  experience,  adding : 

I  have  a  veiy  strong  conviction  that  there  is  a  great  deal  of 
confusion  of  thought,  indifference,  apathy,  lack  of  information 
and  lack  of  conviction  among  bankers  in  general,  and  that  at  best 
very  lukewarm  support  is  being  given. 

As  already  noted,  the  American  Bankers'  Association 
at  its  1917  convention  appointed  a  trade  acceptance  com- 
mittee which  co-operated  in  the  formation  of  the  American 
Trade  Acceptance  Council.  Mr.  Thralls  took  charge  of 
the  publicity  work  among  the  banking  community.  An 
organization  was  developed.  Three  bankers  were  appointed 
by  the  state  bankers'  association  in  each  state,  and  in 
many  cases  committees  were  also  appointed  for  groups 
or  other  subdivisions  of  these  associations,  and  chairmen 

*-See  the  National  City  Bank  of  New  York's  reprints  of  several 
addresses  by  Mr.  B.  D.  Harris,  and  the  Irving  National  Bank  of 
New  York's  series  of  pamphlets,  largely  reprints  of  addresses  by  Mr. 
Pierson,  as  well  as  the  individual  pamphlets  on  Trade  Acceptances 
of  many  of  the  leading  banks. 


126    THE  MECHANISM  OP  COMMERCIAL  CREDIT 

for  counties.  The  president  of  the  American  Institute  of 
Banking  upon  request  appointed  a  committee  of  three  or 
more  junior  officers  in  each  Federal  Reserve  bank  and 
branch  city,  to  which  detail  problems  could  be  submitted 
for  consideration  and  report.  By  December,  1917,  22 
associations  had  already  appointed  trade  acceptance  com- 
mittees and  had  agreed  to  furnish  150  speakers,  while  by 
April,  1918,  there  were  committees  in  every  state,  as  well 
as  in  all  Federal  Reserve  bank  and  branch  centers,  and 
there  was  a  special  American  Institute  of  Banking  Commit- 
tee of  three  members.  An  effort  was  made  to  put  the 
subject  on  the  program  at  the  annual  conventions  of  the 
State  bankers'  associations.  In  May,  1918,  it  was  stated 
that  this  had  been  done  in  the  case  of  29  associations  which 
were  to  hold  conventions,  while  it  was  later  reported  that 
34  associations  had  adopted  resolutions  in  favor  of  the 
trade  acceptance  by  the  fall  of  that  3'ear.  The  mechanism 
thus  created  had  the  further  advantage  of  providing  expert 
advice  on  two  technical  questions  which  were  of  impor- 
tance:  (1)  provision  for  the  most  economical  and  efficient 
method  of  handling  acceptances  in  banks  and  business 
houses  and  (2)  evolution  of  a  satisfactory  schedule  of 
service,  exchange  and  collection  charges.  The  monthly 
Journal  of  the  Association  also  frequently  carried  items 
on  the  trade  acceptance,  and  the  association's  committee 
on  acceptances  was  charged  with  preparing  some  literature. 
The  American  Acceptance  Council.— In  December,  1918, 
plans  were  made  to  reorganize  the  American  Trade  Ac- 
ceptance Council.  At  a  meeting  in  New  Yoi^k  on  January 
21,  1919,  which  was  attended  by  over  250  leading  bankers 
and  busiiiess  men  from  all  parts  of  the  country,  the  reor- 
ganization was  effected  and  the  Council  became  the 
American  Acceptance  Council.  According  to  its  President, 
the  purpose  was  to  broaden  the  scope  and  character  of 
the  work,  and  identify  it  with  a  large  percentage  of  the 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    127 

business  and  financial  interests  of  the  country,  instead  of 
confining  it  to  the  relatively  small  group  which  had  spon- 
sored and  financed  the  initial  movement.  To  the  program 
of  the  American  Trade  Acceptance  Council  was  added  the 
bankers'  acceptance  and  the  extension  of  acceptances  into 
the  foreign  as  well  as  the  domestic  field.  At  the  outset,  it 
had  111  active  members.  This  figure  had  increased  by 
December  4,  1919,  to  about  200  (exclusive  of  16  service 
members),  and  by  October  1,  1921,  to  243  (exclusive  of 
43  service  members).  Its  appeal  has  been,  however,  pri- 
marily to  the  banking  community,  for  of  the  200,  only  14 
were  associations  and  only  58  were  commercial  houses,  and 
of  the  243,  only  9  w^ere  trade  and  bankers'  associations 
and  only  27  were  commercial  concerns,  the  remainder  being 
either  banks,  trust  companies  or  private  bankers.  The  first 
set  of  officers  was  as  follows :  Mr.  Warburg,  Chairman  of 
the  Executive  Committee;  Mr.  Piersou,  President;  Mr. 
Arthur  Reynolds,  Vice-President  of  the  Continental  and 
Commercial  National  Bank  of  Chicago,  Vice-President ;  Mr. 
Thralls,  Secretary ;  Mr.  Percy  H.  Johnston,  President  of 
the  Chemical  National  Bank  of  New  York,  Treasurer;  and 
Mr.  R.  H.  Bean,  Executive  Secretary.  These  officers  have 
changed  somewhat  from  year  to  year,  and  Mr.  Warburg 
is  now  President;  Mr.  E.  C.  Wagner,  Vice-President  of  the 
Discount  Corporation  of  New  York,  Chairman  of  the 
Executive  Committee;  Mr.  Fred  I.  Kent,  Vice-President 
of  the  Bankers'  Trust  Company,  of  New  York,  Vice-Presi- 
dent; Mr.  Johnston,  Treasurer;  and  Mr.  Bean,  Secretary. 

It  will  be  observed  that  the  Council  was  organized  along 
the  same  general  lines  as  its  predecessor,  and  its  methods 
were  also  similar.  It  held  a  regular  annual  convention  at 
Detroit  on  June  9,  1919,  the  day  preceding  the  convention 
of  the  National  Association  of  Credit  Men,  and  has  since 
held  annual  meetings  of  the  Board  of  Representatives  at 
the  opening  of  December,  1920  and  1921.    At  each  meeting, 


128  THE  ]\tECEU.NISM  OP  COMJMERCIAL  CREDIT 

the  trade  acceptance  has  been  considered  to  some  extent. 
The  Council  has  prepared  a  regular  series  of  pamphlets 
on  both  bankers  and  trade  acceptances/^  and  since  Janu- 
ary, 1920,  has  published  an  Acceptance  Bulletin  monthly. 
By  October  20,  1921,  it  had  distributed  400,000  pieces  of 
literature  on  the  trade  acceptance  and  had  engaged  in 
correspondence  with  business  houses  and  associations, 
furnishing  them  with  information  as  to  the  use  of  the 
instrument  and  the  proper  methods  to  be  followed  in  in- 
troducing the  system.  It  has  also  had  a  regular  speakers* 
bureau.  By  March,  1919,  three  local  associations  had  been 
organized  at  Baltimore,  Joliet  and  Rochester,  and  the  fol- 
lowing month  plans  were  well  under  way  for  similar 
associations  in  Cleveland,  Cincinnati  and  Newark.  In 
October,  1921,  it  was  stated  that  the  Council  practically 
had  a  branch  in  Cleveland,  in  the  form  of  the  Cleveland 
Bank  and  Trade  Acceptance  Council,  which  was  part  of 
the  Cleveland  Chamber  of  Commerce. 

Symptomatic  of  general  interest  in  the  trade  acceptance 
was  the  founding  in  May,  1918,  of  a  publication  devoted 
exclusively  to  it,  called  the  Trade  Acceptance  Journal,  and 
published  by  the  National  Trade  Acceptance  Bureau,  Inc., 
of  NcAV  York  City.  Mr.  W.  W.  Wilmot,  who  had  previously 
been  connected  with  the  National  Association  of  Credit 
Men,  was  editor.  The  scope  of  the  publication  was  later 
broadened  and  the  title  was  changed  to  American  Busiiiess 
and  Natimial  Acceptance  Journal,  at  the  same  time  that 
the  editorial  staff  was  changed.  Mr.  W.  L.  Sparling  is  the 
present  editor. 

Trade  Associations  and  the  Trade  Acceptance. — But, 
after  all,  the  business  man  was  the  determining  factor  in 

"  The  list  of  publications  on  the  trade  acceptance  includes : 
"Elements  of  Trade  Acceptance  Practice,"  by  Eobert  H.  Bean. 
"Abuses  to  be  Avoided  in  Trade  Acceptance  Practice,"  hj  David 
C.  Wills. 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    129 

deciding  whether  or  not  the  acceptance  should  be  employed. 
As  the  Federal  Reserve  Bulletin  (Review  of  the  Month, 
September  1,  1917,  issue)  said:  "The  problem  must  be 
solved  by  the  business  man.  Each  trade  must  find  a 
solution  suitable  to  its  own  requirements. "  It  is  therefore 
necessary  to  retrace  our  steps  and  to  consider  the  question, 
not  from  the  point  of  view  of  the  organization  of  the  cam- 
paign for  the  use  of  the  trade  acceptance,  but  from  the 
point  of  view  of  those  to  whom  the  advocates  of  the 
instrument  appealed. 

A  considerable  part  of  the  efforts  of  the  organizations 
cited  above  were  directed  to,  and  bore  fruit  through,  trade 
association  channels.  As  already  indicated,  addresses  were 
delivered  at  conventions,  and  an  active  effort  was  made  to 
obtain  the  endorsement  of  the  instrument  by  the  associa- 
tions. Many  of  the  trade  bodies  themselves  were  actively 
interested  in  the  acceptance,  and  in  seeing  whether,  and  if 
so,  how,  this  previously  little-known  instrument  might  be 
of  service  to  them.  Added  to  their  natural  interest  was 
the  appeal  made  in  1917  on  patriotic  grounds.  The  usual 
procedure  for  these  associations  was  to  appoint  a  special 
trade  acceptance  committee,  generally  distinct  from  the 
ordinary  terms  or  discount  committee,  to  consider  the  mat- 
ter and  report  at  the  following  convention,  at  which  some 
further  discussion  was  often  had.  Where  opinion  was 
favorable,  a  resolution  was  then  passed  endorsing  the  ac- 
ceptance. This  work  with  trade  associations  was  especially 
pronounced  from  about  1917,  until  the  middle  of  1919. 
By  this  time  the  element  of  novelty  had  worn  off,  as  the 
question  had  been  widely  discussed,  and  some  general 
consensus  of  opinion  had  developed  in  most  of  the  associa- 
tions as  to  the  applicability  and  desirability  of  the  accep- 
tance in  their  line.  Likewise,  all  of  the  major  associations 
had  been  approached  by  the  advocates  of  the  acceptance. 

Illustrative  of  the  general  work  along  these  lines  in  the 


130   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

trade  associations  were  the  activities  in  the  hardware  in- 
dustry. The  subject  was  brought  prominently  before  the 
industry  by  Mr.  R.  H.  Treman  in  an  address  before  a  joint 
session  of  the  American  Hardware  Manufacturers'  As- 
sociation and  the  National  Hardware  Association  at 
Atlantic  City  on  October  18,  1916.  During  the  following 
year  the  secretary  of  the  latter  association  issued  consider- 
able literature  on  the  acceptance,  but  he  stated  in  his  report 
at  the  1917  convention  that  other  trade  bodies  were  putting 
it  into  operation  more  rapidly  than  were  members  of  his 
own  organization.  The  executive  committee  in  its  report 
also  remarked  that  it  believed  the  educational  period  had 
about  passed.  In  some  respects  the  work  fitted  into  that 
previously  carried  on  by  the  association,  especially  the  part 
which  concerned  the  observance  by  retailers  of  the  terms 
quoted,  but  this  apparently  was  not  strong  enough  to  over- 
come the  usual  wholesaler's  objections  to  the  use  of  the 
instrument.  At  the  1918  convention,  the  use  of  terms  call- 
ing for  2  per  cent  10  days,  1  per  cent  30  days  or  1  per  cent 
10th  proximo,  net  60  days  trade  acceptance  was  discussed, 
but  at  the  1921  convention  only  7  or  8  hands  were  raised  in 
response  to  a  question  as  to  how  many  of  those  present  used 
the  trade  acceptance.  In  the  South,  however,  it  has  appar- 
ently fared  better.  In  September,  1918,  the  matter  was 
discussed  at  the  Southern  association's  convention  at 
Atlanta,  and  various  groups  agreed  to  use  it.  Quite  a  few 
members,  especially  in  the  South,  had  already  employed 
terms  of  2  per  cent  10  days,  net  30  days  or  60  days  trade 
acceptance,  while  the  Texas  Association  in  May  of  that  year 
had  favored  these  terms,  and  they  were  subsequently  used 
in  the  south  of  the  state. 

Opposition  to  the  Trade  Acceptance. — At  no  time  dur- 
ing the  course  of  the  trade  acceptance  movement  was 
opposition  lacking.  This  opposition  dates  back  to  the  days 
when  the  Federal  Reserve  Act  was  being  framed.    In  many 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    131 

lines  there  was  apathy  or  skepticism;  in  some,  active  op- 
position. Gradually  this  opposition  crystallized  in  the  lead- 
ing wholesale  lines.  Although  efforts  had  been  made  to 
enlist  their  support,  the  associations  in  these  lines  remained 
unconverted  and  in  some  cases  definitely  opposed  the  trade 
acceptance.  Most  prominent  among  such  lines  was  whole- 
sale groceries.  Although  the  matter  was  presented  to 
the  National  Wholesale  Grocers'  Association  by  no  less 
an  authority  than  Mr.  Pierson  (at  the  convention  in 
Cleveland  on  June  14,  1918),  the  organization  remained 
strongly  opposed  to  the  trade  acceptance.  At  both  this 
and  the  next  convention,  the  association's  Trade  Accept- 
ance Committee,  under  the  chairmanship  of  Mr.  Sylvan  L. 
Stix  of  Seeman  Brothers,  New  York,  presented  an  adverse 
report,  holding  that  the  trade  acceptance  would  tend  to 
lengthen  terms  and  increase  credit  risks,  and  hence  would 
be  a  step  backward  in  their  line.  A  resolution  to  this 
effect  was  approved  by  the  Executive  Committee  in  1918, 
and  similar  resolutions  were  passed  in  the  spring  of  that 
year  by  eight  territorial  associations  and  the  executive  com- 
mittees of  another  territorial  association  and  the  National 
Coffee  Roasters'  Association.  The  wholesale  grocers  have 
been  among  the  staunchest  upholders  of  the  cash  discount 
in  the  mercantile  community,  and  have  had  a  committee 
dealing  with  discounts  on  their  purchases  for  many  years. 
Other  wholesale  lines  displayed  less  pronounced  opposition, 
but  some  of  them  joined  actively  to  resist  the  movement. 
Prominent  among  the  leaders  of  the  opposition  was  Mr. 
Wallace  D.  Simmons,  President  of  the  Simmons  Hardware 
Company  of  St.  Louis." 

A  second  group  of  opponents  of  the  trade  acceptance 

"  See  an  address  on  ' '  The  Importance  of  the  Cash  Discount  in  the 
American  Credit  System,"  before  the  New  York  Wholesale  Grocers' 
Association  at  New  York,  January  15,  1919;  also  an  address  on  "The 
American  Credit  System."  before  the  Southern  ^^Tiolesnle  Grocers' 
Association  at  New  Orleans,  May  8,  1919. 


132    THE  MECHANISM  OF  COMMERCIAL  CREDIT. 

centered  around  Messrs.  George  H.  Paine  and  John  S. 
Jenks,  Jr.,  of  Philadelphia.  These  two  gentlemen  had 
been  interested  in  American  credit  practice  and  Mr.  Paine 
had  followed  the  plan  of  reprinting  and  distributing  arti- 
cles and  addresses  which  he  believed  would  be  of  interest 
to  the  banking  and  business  community.  As  a  result  of 
their  studies,  by  the  middle  of  1916,  a  modified  form  of 
acceptance  had  been  devised,  termed  the  "Jenks  bill," 
which  was  designed  to  meet  certain  of  the  objections  raised 
to  the  regular  trade  acceptance.  At  the  opening  of  1917, 
it  was  brought  forward  more  definitely  but  its  career  was 
cut  short  by  the  advent  of  the  war.^^  Messrs.  Paine  and 
Jenks  have  been  in  active  correspondence  with  business  men 
for  years  as  to  the  principles  underlying  the  credit  system, 
and  on  several  occasions  have  endeavored  to  obtain  replies 
to  a  systematic  list  of  questions  as  to  the  theory  underlying 
the  trade  acceptance.  Since  the  close  of  the  war  they  have 
not  brought  the  Jenks  Bill  forward  again,  but  have  con- 
tented themselves  instead  with  continuing  their  opposition 
to  the  trade  acceptance. 

The  growth  of  the  opposition  to  the  trade  acceptance  is 
well  illustrated  in  the  situation  which  developed  in  the 
Chamber  of  Commerce  of  the  United  States.  As  will  be 
recalled,  this  organization  was  one  of  the  three  which 
co-operated  in  1917,  in  the  movement  leading  toward  the 
formation  of  the  American  Trade  Acceptance  Council.  A 
trade  acceptance  committee  was  formed,  and  trade  accept- 
ances were  on  the  progi'am  at  the  annual  meeting  at 
Chicago  in  June,  1918,  at  which  considerable  discussion 
ensued.  The  question  was  raised  that  the  Chamber  was 
not  officially  committed  to  the  trade  acceptance  and  in 
accordance  with  its  usual  procedure  could  not  be  so  com- 
mitted without  a  referendum.    A  special  committee  of  14 

"  For  a  full  description  of  the  bill,  see  Journal  of  the  American 
Bankers  Association,  August,  1916,  pp.  107  ff. 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    133 

members,  composed  of  Messrs.  Pierson,  Hayes,  Hirsch, 
Holdsworth,  Hooker,  Jenks,  Nones,  Simmons,  Stix,  Sulli- 
van, Tregoe,  Treman,  Wills  and  Woodruff,  accordingly 
studied  the  subject  with  a  view  to  submitting  a  report  to 
the  Board  of  Directors,  which  might  in  turn  be  sent  to 
the  entire  membership  in  the  form  of  a  referendum.  The 
committee  contained  ten  members  who  had  been  more  or 
less  identified  with  the  American  Trade  Acceptance  Coun- 
cil, while  the  remaining  four  had  been  strong  opponents  of 
the  acceptance.  It  could  not  find  common  ground  for  a 
unanimous  report,  and  accordingly  submitted  separate  ma- 
jority and  minority  reports  to  the  Board  of  Directors.  On 
October  1,  1919,  this  body  voted  that  the  reports  should 
be  edited  and  placed  in  the  form  of  arguments  in  favor 
of  and  opposed  to  trade  acceptances,  and  then  distributed 
to  the  membership  of  the  Chamber  for  their  information, 
which  was  done.    No  referendum  was  held. 

Meanwhile,  there  was  also  some  opposition  in  the  ranks 
of  those  organizations  which  had  taken  the  lead  in  ad- 
vocating the  use  of  the  trade  acceptance.  At  meetings  of 
the  American  Trade  Acceptance  Council,  opponents  of  the 
instrument  were  in  attendance  and  presented  their  ideas. 
As  time  went  on,  credit  men  who  were  not  in  favor  of  the 
trade  acceptance  gradually  gave  expression  to  their  views, 
and  these  made  their  appearance  in  the  Bidletin  of  the 
National  Association  of  Credit  Men.  Among  the  leaders 
here  was  Mr.  J.  H.  Scales,  Treasurer  of  the  Belknap  Hard- 
ware and  Manufacturing  Company  of  Louisville.  All  in 
all,  however,  where  active  support  was  not  found  within 
the  association,  apathy  was  much  more  pronounced  than 
definite  opposition. 

The  Post-War  Period. — There  was  undoubtedly  a  consid- 
erable impetus  given  to  the  use  of  the  trade  acceptance 
during  the  war  period.  The  movement  was  prosecuted 
much  more  Vigorously,  while  there  would  also  naturally  be 


134   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

greater  attention  paid  to  it  at  a  time  when  financial  and 
credit  problems  were  intensilied.  This  was  the  period  dur- 
ing which  some  firms  created  the  "Liberty  acceptance." 
On  the  other  hand,  the  opponents  of  the  instrument  actively 
combated  the  patriotic  appeal,  and  in  the  latter  part  of 
1918  received  a  letter  from  Governor  Harding  of  the 
Federal  Reserve  Board  in  which  he  said: 

The  Board  has  no  desire  to  influence  anyone  to  use  the  trade 
acceptance  against  his  will  and  deprecates  the  use  of  the  word 
"patriotism"  in  this  conne<'tion. 

With  the  close  of  the  war,  the  movement  gradually  lost 
momentum,  as  the  period  of  stress  was  over,  and,  moreover, 
as  each  of  the  leading  industries  had  been  thoroughly  can- 
vassed. By  about  the  close  of  1919,  these  conditions  had 
become  thoroughly  established  and  a  third  period  in  trade 
acceptance  history  appeared,  in  which  the  use  of  the 
acceptance  became  more  a  matter  of  course.  Mr.  Orr  has 
characterized  it  as  follows  in  a  letter  to  the  writer : 

Now  that  the  novelty  of  the  acceptance  has  worn  off  it  is  not 
so  commonly  a  subject  of  discussion.  ...  It  has  just  become  a 
natural  way  to  handle  certain  accounts  and  no  credit  man  thinks 
he  is  doing"  anything  out  of  the  usual  to  ask  for  acceptances. 
Therefore,  he  doesn't  talk  so  much  about  it. 

The  new  period  was  thus  characterized  by  a  more 
judicial  spirit  and  a  more  dispassionate  discussion  and 
careful  weighing  of  the  facts  of  the  situation.  It  resulted 
in  an  effort  to  appraise  more  exactly  the  merits  of  the  case, 
and  to  discount  extravagant  claims  and  counter-claims. 
This  attitude  had  already  been  found  previously  in  certain 
quarters.  At  the  Chicago  convention  of  the  American 
Trade  Acceptance  Council  in  June,  1918,  Mr.  Warburg 
had  said: 

Both  sides,  to  my  mind,  have  made  the  mistake  of  over-stating 
their  ease.     The  champions  of  the  trade  acceptance  are  not  war- 


TEADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    135 

ranted  in  saying  that  it  is  the  only  proper  instrument  of  credit, 
that  it  should,  or  will,  drive  out  rapidly  all  single  name  paper  and 
the  cash  discount  system,  that  to  use  it  is  the  highest  degree  of 
jiatriotism  and  that  to  refrain  from  using  it  shows  a  lack  of 
public  spirit.  On  the  other  hand,  it  is  equally  unwarranted  td 
assert  that  the  use  of  the  trade  acceptance  by  the  business  men 
and  bankers  in  the  United  States  is  impracticable,  or  that  its 
adoption  makes  for  bad  and  unsound  business  habits. 

Careful  observers  as  early  as  1917,  had  discerned  elements 
of  danger  in  mistaken  views  that  were  being  spread.  As 
time  v^'cnt  on,  specific  abuses  appeared.  These  abuses  were 
described  by  the  American  Acceptance  Council  in  its 
Acceptance  Bulletin,  as  follows: 

So  far  as  we  have  leai-ned,  these  practices  have  been  largely,  if 
not  entirely,  confined  to  houses  of  minor  importance,  and  they 
were  possibly  not  surprising  in  view  of  the  period  of  credit  strain 
which  was  endured  last«summer  and  autumn,  particularly  in  the 
textile  lines,  regarding  which  the  complaints  were  most  general, 
and  the  ignorance  or  lack  of  appreciation  among  the  smaller  and 
less  well-inforaied  commercial  concerns  as  to  the  proper  use  of 
the  trade  acceptance.  A  flabbiness  of  commercial  moral  fiber  may 
also  have  been  a  contributing  cause. 

Criticism  has  also  been  heard  of  the  trade  acceptance  with 
regard  to  its  use  in  more  or  less  speculative  operations  in 
goods  between  jobbers  and  middlemen,  many  of  whom  injected 
themselves  into  the  textile  markets  during  the  period  of  as- 
cending prices,  of  silks,  particularly,  but  other  textile  lines 
as  well. 

The  Council  has  been  informed  that  speculators  were  prone  to 
buy  goods  on  trade  acceptance  terms  which  they  would  resell  on 
similar  teims  and  that  the  same  goods  would  rotate  by  sale  and 
resale  among  this  class  of  speculative  traders,  with  a  trade  accept- 
ance being  issued  in  each  case,  so  that  before  the  maturity  of  tM 
bill  issued  on  the  first  sale,  there  might  be  several  bills  created  in 
respect  of  new  speculative  transactions  in  the  same  banks  of 
traders,  and  in  some  cases,  these  were  discovmted. 

These  abuses  were  recognized  from  the  opening  of  1919 
CD,  by  friends  as  well  as  foes  of  the  acceptance,  and  atten- 


136   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

tion  was  called  to  them.  Thus  the  National  Association  of 
Credit  Men  said  in  its  Bulletin  that  year : 

"We  must  exercise  vigilance  that  the  remarkable  instrument 
brought  to  us  through  the  special  provision  of  the  Federal 
Reserve  Act  is  not  abused  through  willful  ignorant  misuse.  Inci- 
dentally, we  urge  our  members  to  approach  the  use  of  the! 
acceptance  in  orderly  manner,  and  the  acceptance  forms  and  intro- 
ductory explanatory  letter  issued  by  the  Association  will  help  do 
this  (p.  97). 

The  best  friend  of  the  acceptance  and  of  the  Federal  Reserve 
Board  which  has  given  the  acceptance  its  support  from  the  start, 
is  he  who  immediately  voices  his  disapproval  on  discovering  an 
abuse  or  misuse  of  the  acceptance,  no  matter  how  slight  that  abuse 
may  be  (p.  355). 

Mr.  D.  C.  Wills  delivered  an  address  before  the  1919 
Convention  of  the  American  Acceptance  Council  on 
"Dangers  to  be  Avoided  in  Trade  Acceptance  Practice." 
The  National  Association  of  Credit  Men  also  recognized 
the  existence  of  abuses  in  the  resolution  at  its  1920  con- 
vention endorsing  the  acceptance  and  emphasized  its 
disapproval  of  them.  An  addi-ess  was  delivered  by  Dr. 
H.  P.  Willis,  former  secretary  of  the  Federal  Reserve 
Board,  and  at  one  time  a  staunch  advocate  of  the 
use  of  the  acceptance,  before  the  New  York  State 
Bankers  Association  at  Asbury  Park,  N.  J.,  June  17, 
1920,  on  "Acceptances — A  Neglected  Element  in  In- 
flation." 

Trade  Acceptances  at  Federal  Reserve  Banks. — Mean- 
while a  change  was  also  taking  place  in  the  status  of  trade 
acceptances  at  Federal  Reserve  Banks.  On  January  1, 
1919,  all  banks  granted  acceptances  of  16-90  days  maturity 
a  preferential  rate  1/4  per  cent  below  that  on  ordinary 
paper,  and  the  rate  was  4  1/2  per  cent  in  all  districts 
except  Kansas  City  and  San  Francisco,  where  it  was 
4  3/4  per  cent.  It  gradually,  however,  became  the  policy 
to  reduce  the  number  of  classes  of  paper  (especially  by 


TRADE  ACCEPTANCE  MOVEMENT  IN  U.  S.    137 

disregarding  differences  in  maturity),  and  to  bring  the 
rates  on  different  classes  of  paper  more  nearly  into  harmony 
with  each  other.  Changes  in  rates  were  particularly  pro- 
nounced in  November  and  December,  1919,  and  on  January 
1,  1920,  there  was  a  preferential  rate  of  1/4  per  cent  on 
acceptances  having  a  maturity  of  not  over  90  days  in  only 
6  districts  (1/2  per  cent  on  61-90  day  acceptances  in  one 
of  these).  The  rate  stood  at  4  1/2  per  cent  in  all  these 
6  districts,  at  4  per  cent  in  4  others,  and  at  5  per  cent  in 
2  others.  During  1920,  rates  on  all  classes  of  paper  and  in 
all  districts  were  greatly  advanced,  so  that  at  the  close 
of  the  year  the  rates  were  5  1/2  per  cent  in  1  district,  6 
per  cent  in  6  districts,  6  1/2  per  cent  in  1  district  and  7 
per  cent  in  4  districts,  while  preferential  rates  remained 
in  only  2  districts,  namely  Cleveland  (1/4  per  cent)  and 
Minneapolis   (1/2  per  cent). 

An  indication  of  trade  acceptance  operations  at  Federal 
Reserve  Banks  throughout  the  entire  period  is  afforded 
by  the  following  figures,  showing  the  volume  discounted,  by 
quarters. 


Volume  op  Trade  Accertances  Discounted  by  Fedekajj  Reserve 
Banks  Quarterly,  1915-1921 

(In  thousands  of  dollars) 


1915 

1916 

1917 

1918 

1919 

•1920 

1921 

Jan.-Mar. 
April-June 
July-Sept. 
Oct.-Dec. 

320 
1,639 

989 

814 

1,038 

2,371 

2,193 

4,967 

3,871 

26,740 

49,446 
39,098 
47,501 
51,327 

28,345 
23,079 
25,541 
61,455 

50,904 
45,775 
44,628 
50,850 

45,136 
30,564 
25,428 
27,550 

Year 

1,959 

5,212 

37,771 

187,372 

138,420 

192,157 

128,678 

The  volume  of  domestic  trade  acceptances  bought  in  the 
open  market  has  been  very  small  as  is  shown  by  the  fol- 
lowing figures  for  recent  years: 


138  THE  MECHANISM  OF  COMIVIERCIAL  CREDIT 

VoLTTME  OP  Trade  Acceptances  in  the  Domestic  Trade, 

Bought    by    Federal    Reserve   Banks    in 

Open  Market,  Quarterly,  1919-1921 

(In  thousands  of  dollars) 


1919 

1920 

1921 

Jannai^-March 
April-June 
July-September 
October-December 

1,876 
],183 
1,475 
4,734 

1,143 

2,950 

418 

1,240 

85 

Year 

9,269 

5,751 

85 

Trade  acceptances,  for  a  good  while  after  the  formula- 
tion of  the  Board's  regulation  in  1915,  were  taken  only 
very  sparingly  by  banks,  partly  because  of  the  practice 
of  owners  of  such  acceptances  of  holding  them  without 
discounting,  and  partly  because  of  the  greater  familiarity 
of  the  banks  with  the  straight  single  name  note.  For  the 
same  reasons  they  were  presented  only  very  sparingly  to 
Federal  Reserve  Banks  and  but  few  of  them  found  lodg- 
ment there.    A  considerable  falling  off  is  shown  in  1921. 


CHAPTER  VIII 

EXTENT   OF    USE   OF    THE   TRADE   ACCEPTANCE 

A  number  of  surveys  have  been  made  of  the  extent  to 
which  the  trade  acceptance  is  employed.  Most  of  them, 
however,  have  been  partisan  in  the  sense  of  having  been 
made  either  by  friends  or  by  foes  of  the  acceptance.  In 
most  of  them  the  endeavor  has  been  to  address  a  question- 
naire to  business  houses  which  may  be  using  the  instrument, 
covering  such  matters  as  the  extent  to  which  the  firm 
addressed  uses  the  acceptances  on  its  accounts,  its  experi- 
ence, etc.  Inquiries  have  also  been  addressed  to  banks 
covering  the  practice  of  their  customers,  as  well  as  their 
own  procedure.  Surveys  such  as  these  are  of  interest  as 
indicating,  in  a  general  waj'',  the  field  of  use  and  the 
problems  arising  in  connection  with  the  instrument.  These 
problems  including  the  difficulties  encountered  in  introduc- 
ing the  acceptance,  the  attitude  of  the  banks  as  to  the  rate 
of  discount  and  amount  of  credit  extended  on  acceptances 
as  contrasted  with  ordinary  single  name  paper,  the  effect 
of  the  use  of  the  instrument  upon  collections,  and  the  use 
of  the  acceptance  on  a  firm's  purchases  as  well  as  on  its 
sales.  Particularly  were  such  surveys  of  value  in  the  early 
stages  of  the  movement.  As  the  acceptance  became  more 
thoroughly  developed,  these  studies  became  defective  in 
that  they  failed  to  recognize  the  peculiar  conditions  found 
in  different  industries,  and  did  not  serve  to  indicate  defi- 
nitely the  particular  fields  of  business  to  which  the 
acceptance  appeared  most  applicable.  Analysis  of  this 
kind  should  be  the  second  step  in  a  study  of  the  question, 


140   THE  MBCHi^NISM  OF  COMMERCIAL  CREDIT 

supplementing  the  earlier,  more  general  surveys.  The  data 
for  such  an  analysis  are  available  in  Part  III  of  the  present 
work,  and  will  be  brought  together  later  in  the  present 
chapter.  Some  of  the  surveys  of  the  kind  just  described 
also  include  questions  designed  to  elicit  opinions  on  the 
theory  of  the  acceptance,  as  will  be  indicated  below. 

Surveys  of  the  Use  of  the  Acceptance. — At  various  times 
published  statements  have  appeared  as  to  the  number  of 
firms  known  or  believed  to  be  using  the  trade  acceptance. 
A  committee  of  Federal  Reserve  Agents  reported  in  De- 
cember, 1916,  that  they  had  a  list,  known  to  be  very 
incomplete,  of  70  companies  belonging  to  40  lines,  and 
located  in  18  states.  Dealers  in  cotton,  cotton  goods  and 
cotton  mills  were  most  prominent,  with  the  lumber  indus- 
try second.  The  trade  acceptance  appeared  to  have  had 
a  readier  reception  among  concerns  of  smaller  capital, 
although  a  number  of  high  rated  companies  also  were  in- 
cluded. It  was  said  in  the  Journal  of  the  Amencan 
Bankers  Associatiofi  for  November,  1917,  that  it  was  plain 
that  the  West  was  waiting  to  see  what  the  East  was  going 
to  do  on  trade  acceptances,  but  was  ready  and  willing  to 
fall  into  line.  The  following  issue  stated  that  about  1600 
representative  wholesale  firms  had  adopted  it  as  a  substi- 
tute for  the  open  account.  The  report  of  the  Association's 
Trade  Acceptance  Committee  at  the  1918  convention  stated 
that  while  a  year  before  there  were  185  known  users  of 
the  trade  acceptance,  the  number  had  increased  to  many 
thousand  during  the  year.  From  this  time  on,  figures 
given  are  generally  estimates,  and  are  designed  to  include 
those  firms  which  use  the  acceptance  only  in  infrequent 
cases,  as  well  as  those  which  make  it  an  integral  part  of 
their  terms.  Mr.  R.  II.  Bean,  Executive  Secretary  of  the 
American  Acceptance  Council,  estimated  under  date  of 
October  22,  1921,  that  upwards  of  25,000  firms  were  using 
acceptances,  and  stated  that  the  number  was  constantly 


EXTENT  OF  USE  OF  TRADE  ACCEPTANCE    111 

increasing.  Some  leading  authorities  believe  that  90  per 
cent  or  more  of  the  trade  acceptances  now  used  are  em- 
ployed as  collection  instruments,  but  hold  that  this  makes 
for  closer  collections,  and  hence  is  a  step  toward  better 
credit. 

The  trade  acceptance  did  not  receive  attention  from  the 
business  community  immediately,  but  active  discussion 
began  in  1916.  The  tirst  survey  accordingly  was  com- 
menced in  that  year,  and  up  to  1921,  10  inquiries  have  come 
to  the  writer's  notice,  as  follows: 

1.  Federal  Reserve  Board  in  1917. 

2.  Federal  Reserve  Agents  in  1916-1918  (partly  referred 
to  above). 

3.  The  National  Association  of  Credit  Men  in  1916-1918 
(not  available). 

4.  The  American  Trade  Acceptance  Council  in  1917- 
1918  (not  available). 

5.  The  Business  Bourse  of  New  York  in  1918. 

6.  Mr.  W.  W.  Wilmot  of  the  Trade  Acceptance  Journal 
in  1918  (not  available). 

7.  Messrs.  Paine  and  Jenks  of  Philadelphia  in  1917-1918. 

8.  The  National  Association  of  Manufacturers  (not 
available). 

9.  Survey  of  1918. 

10.  Mr.  Park  Mathewson,  of  the  Business  Bourse,  in 
1921. 

Certain  of  these  inquiries  included  banks  as  well  as  busi- 
ness houses,  and  some  covered  the  theory  as  well  as  the  use 
of  the  instrument.  The  results  of  some  of  the  investiga- 
tions, however,  are  not  available,  and  they  are  accordingly 
omitted  in  the  discussion  which  follows. 

The  Federal  Reserve  Board  Inquiry  of  1917. — Numer- 
ous inquiries  received  during  the  early  part  of  1917  led 
the  Federal  Reserve  Board  in  June  of  that  year  to  author- 


142   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

ize  an  informal  inquiry  under  the  direction  of  the  secretary 
into  the  conditions  under  which  the  trade  acceptance  was 
then  being  used.  Replies  were  received  from  368  banks 
and  385  business  houses,  and  of  these  242  bank  and  203 
mercantile  letters  alone  gave  actual  information.  Addi- 
tional material  was  received  from  certain  Federal  Reserve 
Banks,  mercantile  associations  and  independent  investi- 
gators. The  results  of  the  study  may  be  summarized  as 
follows : 

Banks'  Data: 

1.  The  large  majority  of  answers  stated  that  the  number  of  a 

bank's  clients  who  requested  customers  to  whom  they  sold 
to  furnish  trade  acceptances  was  either  negligible  or  nil. 
Only  6  of  63  banks  reported  over  6  firms  making  such  a 
request. 

2.  Of  the  concerns  which  were  ssking  their  customers  to  furnish 
acceptances,  practically  none  were  known  to  be  giving 
trade  acceptances  to  those  of  whom  they  purchased. 

3.  In  the  majority  of  cases  where  acceptances  were  being  re- 
quired, the  action  was  taken  with  a  distinct  view  to  pre- 
senting the  paper  for  discount  at  the  bank. 

4.  Owing  to  the  comparative  scarcity  of  acceptance  paper,  no 
specified  rate  on  trade  acceptances  was  in  effect  on  July  2, 
1917,  but  each  ease  was  treated  on  its  individual  meiits. 

5.  Of  148  banks,  70  either  made  a  rate  lower  than  on  the  direct 
note  of  the  concern,  usually  from  i/^  per  cent  to  1  per  cent, 
or  would  make  such  a  rate  should  acceptances  be  offered, 
while  the  remainder  gi'anted  or  would  grant  the  same 
rate  on  both  forms  of  paper. 

6.  Of  167  banks,  153  would  grant  a  larger  line  on  trade  ac- 
ceptances, while  the  remainder  would  merely  grant  the 
same  line.  The  proportion  of  increase  generally  varied  from 
10  to  100  per  cent. 

Business  Houses'  Data: 

1.  Forty-five  concerns  at  that  time  requested  their  customers 
to  give  trade  acceptances,  while  141  were  not  in  the  habit 
of  doing  this. 


EXTENT  OF  USE  OF  TRADE  ACCEPTANCB    143 

2.  Eleven  were  in  the  habit  of  giving  acceptances  themselves, 
while  176  were  not.  It  appeared  to  be  the  custom  among" 
those  who  were  inclined  to  the  use  of  the  acceptance  to 
request  the  instrument  of  eustomei"s  but  not  to  offer  it  them- 
selves to  creditors.  A  considerable  number  of  the  45  houses 
that  asked  customers  to  give  acceptances  did  not  habitually 
do  so,  but  in  most  cases  requested  them  from  concerns 
which  were  slow  in  payment. 

3.  Of  55  houses,  51  believed  (based  in  the  majority  of  cases 
upon  opinion)  that  the  trade  acceptance  would  be  paid 
more  promptly  than  would  the  open  account. 

4.  Of  44  houses,  22  were  in  the  habit  of  discounting  ac- 
ceptances held  by  them,  while  the  other  22  were  not.  Of  31 
concerns,  only  8  received  or  had  been  promised  a  lower 
rate  than  on  straight  paper. 

5.  Of  15  concerns,  9  were  receiving  or  had  been  promised  a 
larger  line  of  credit  on  trade  acceptance. 

6.  Of  46  concerns  not  in  the  habit  of  asking  or  giving  trade 
acceptances,  because  of  credit  conditions  prevailing  in  their 
particular  branch  of  trade,  26  approved  the  principle  but 
the  other  20  expressed  themselves  as  strongly  opposed  to 
the  idea  of  the  acceptance. 

Inquiries  of  Trade-Acceptance  Advocates  in  1918. — 
Neither  the  inquiries  of  the  National  Association  of  Credit 
Men,  extending  from  1916  on,  nor  the  inquiries  of  the 
American  Trade  Acceptance  Council,  commencing  in  1917, 
were  systematic,  but  consisted  rather  of  letters  received  at 
various  times  from  business  houses  using  the  trade  accept- 
ance. Aside  from  the  material  published  by  both  bodies, 
the  results  of  these  inquiries  are  not  available. 

In  1918,  the  Business  Bourse,  a  commercial  organization 
with  headquarters  in  Ncav  York,  also  undertook  an  investi- 
gation. The  outcome  of  the  inquiry  on  the  whole  was 
favorable,  and  the  statements  of  the  organization  were  evi- 
dently made  with  the  intent  of  sustaining  and  furthering 
the  development  of  the  instrument.  While  the  arguments 
presented  in  favor  of  the  trade  acceptance  were  the  familiar 
statements  often  contained  in  trade  acceptance  literature, 


144    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

of  over  200  individuals  with  whom  the  organization  had 
corresponded,  all  of  whom  were  using  trade  acceptances, 
only  one  appeared  to  be  dissatisfied.  Many  of  those  who 
expressed  themselves  favorably  on  the  question,  however, 
were  using  it  as  a  collection  instrument. 

Mr.  W.  W.  Wilmot  of  the  Trade  Acceptance  Journal, 
who  had  formerly  been  with  the  National  Association  of 
Credit  Men,  addressed  a  letter  in  September,  1918,  to  about 
800  persons  in  which  he  asked  .5  questions  about  the  atti- 
tude of  banks  toward  the  trade  acceptance,  the  results  of 
which,  unfortunately,  are  not  available. 

Investigation  of  Messrs.  Paine  and  Jenks. — In  1917,  an 
inquiry  was  also  made  on  behalf  of  Messrs.  George  H.  Paine 
and  John  S.  Jenks,  Jr.,  of  Philadelphia,  by  Professor  John 
J.  Sullivan  of  the  Department  of  Law  of  the  University  of 
Pennsylvania.  The  character  of  the  inquiry  will  be  seen 
from  the  following  questionnaire  which  was  sent  out : 

1.  In  View  or  the  long-  established  and  admittedly  sound  prac- 

tice in  this  country  whereby  a  seller  of  goods 
offers  the  buyer,  for  prompt  payment  ("cash"), 
a  premium  ("discount")  greatly  in  excess  of  a 
bank's  interest  charge  for  the  full  credit  period; 
and 

In  View  of  the  facilities  now  offered  by  the  Federal  Re- 
serve Banks  to  enable  local  banks  to  finance 
local  merchants  in  their  purchase  of  commodi- 
ties needed  by  the  local  communities; 

I  Would  Ask:  Should  we  not  discourage  a  practice  which 
requires  the  seller  to  bear  the  burden  of  financ- 
ing the  buyer,  and  encourage  instead,  a  practice 
which  will  facilitate  local  bank  financing  of 
the  local  merchants  and  thus  enable  the  local 
merchant  (the  buyer)  to  take  advantage  of  the 
premium  ("discount")  offered  by  the  seller  for 
prompt  payment  ("cash")  ? 

2.  In  View  of  the  fact  that  the  buyer  of  goods  receives,  in  the 

quotations  and  the  invoices  covering  his  pur- 


EXTENT  OF  USE  OF  TRADE  ACCEPTANCE    145 

chases,  a  specific  offer  of  a  large  premium 
("discount")  for  payment  within  (usually)  ten 
days;  and 

In  View  of  the  fact  that  this  premium  ("discount")  is 
practically  interest  at  an  exceedingly  heavy 
rate,  eonsideiing  the  fixed  period  within  which 
the  buyer  is  pledged  to  pay ; 

I  Would  Ask  :  Should  any  written  promise  of  payment 
(regardless  of  its  form)  which  is  signed  by  a 
buyer  who  fails  to  take  the  large  "cash" 
premium  ("discount"),  be  deemed  such  com- 
plete evidence  of  that  buyer's  ability  to  pay  as 
to  wan-ant  a  banker  or  a  seller  of  goods  in 
largely  increasing  the  amount  he  would  other- 
wise lend  or  sell  to  that  buyer? 

3.  In"  View  of  the   offer   of   a    large   premium    ("discount") 

usually  made  by  a  seller  to  a  buyer  for  prompt 
payment  ("cash") ;  and 

In  View  op  what  has  been  said  condemning  the  "open  ac- 
count" and  the  commercial  credit  practice  out 
of  which  that  grew;  that  is  to  say,  the  seller 
financing  the  buyer  for  the  credit  period  at 
what  amoimts  to  an  excessive  and  usurious 
interest  rate;  and 

In  View  of  the  rediscount  facilities  now  offered  by  the  Fed- 
eral Resen'e  System  which  enable  local  banks 
to  finance  any  sound  local  merchant  in  the  pur- 
chase of  commodities  for  his  locality; 

I  Would  Ask  :  Is  an  open  account,  or  any  written  promise 
of  payment  (regardless  of  its  form),  of  a  buyer 
who  fails  to  take  advantage  of  the  large 
premium  ("discount")  offered  by  a  seller  for 
prompt  payment  ("cash"),  a  consistently  good 
investment  at  its  face  value  for  a  commercial 
house  or  a  bank? 

4.  In  View  op  what  has  been  said  in  connection  with  the  pre- 

ceding questions ; 
I  Would  Ask  :  When  a  buyer  takes  up  his  own  acco^int  by 
signing  negotiable  paper  for  the  amoimt  there- 
of, which  the  seller  endorses  and  then  gets  his 
bank  to  diseoimt,  does  not  this  mean  that  the 


146    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

seller  is  lending  his  own  credit  to  finance  the 
buyer's  purchase  of  goods,  and  is  not  the  seller 
practically  an  accommodation  endorser? 

About  160  answers  were  received,  including  those  of  both 
business  men  and  students.  The  majority  of  the  answers 
were  accompanied  with  interesting  and  illuminating  letters. 
Professor  Sullivan  analyzed  these  as  follows: 

1.  That  under  existing  commercial  practice  most  trades  have 
become  habituated  to  the  use  of  the  so-called  "cash  discount" 
which,  in  accordance  with  that  practice,  the  seller  almost  uni- 
versally offers  the  buyer  for  prompt  payment.  With  few 
exceptions  the  business  houses  of  the  country  show  themselves 
inclined  to  maintain  this  practice. 

2.  That  when  this  premium  or  "cash  discount"  is  offered,  it  is 
only  in  transactions  where  the  buyer  fails  to  take  it  that  a 
trade  acceptance  can  be  used. 

3.  That,  as  this  premium  or  "cash  discount"  equals  an  interest 
rate  of  from  14  per  cent  to  40  per  cent  per  annum,  the  buyer 
who  fails  to  take  it  must  be  either  an  inferior  credit  risk  or 
a  poor  business  man. 

4.  That  financing  of  the  buyer  by  the  seller  is  wrong  in  prin- 
ciple, and  is  the  gi'eat  weakness  in  our  commercial  system, 
no  matter  in  what  form  it  is  practiced,  open  accounts,  notes 
or  acceptances. 

5.  That  the  premium  or  "cash  discount,"  offered  the  buyer  for 
prompt  payment,  is  the  seller's  weapon  against  the  practice 
of  his  financing  the  buyer. 

6.  That  the  buyer  represents  his  community  and  not  the  seller. 
Therefore,  the  buyer's  community  should  finance  him  and, 
where  the  buyer  properly  represents  it,  it  will  and  can  do 
this  through  its  bank  or  banks,  in  order  to  escape  payment 
of  the  high  cost  of  credit  which  the  buyer  must  pay  if  the 
seller  finances  him  and  which  the  buyer,  so  paying,  must  in- 
clude in  his  price  to  the  community. 

7.  That  some  communities  have  been  without  adequate  banking 
facilities  but  the  increased  powers  and  privileges  granted 
banks  under  the  Federal  Reserve  System  enable  this  disability 
to  be  effectually  removed. 

8.  That  all  efforts  to  make  changes  should  be  to  force  and 
develop  local  financing  of  the  buyer. 


EXTENT  OF  USE  OF  TRADE  ACCEPTANCE    147 

Under  date  of  December  28,  1917,  these  were  sent  to  each 
gentleman  who  had  replied  to  the  questionnaire,  and  many- 
further  letters  were  received,  expressing  substantial  agree- 
ment with  the  conclusions. 

Survey  of  1918. — In  the  autumn  of  1918,  an  impartial 
investigator  addressed  a  questionnaire  to  about  250  busi- 
ness houses  and  about  125  banks,  the  aim  being  to  cover 
all  the  leading  lines  and  all  sections  of  the  country. 

The  general  conclusions  reached,  based  both  upon  this 
survey  and  upon  the  results  obtained  by  previous  investi- 
gators, were  as  follows : 

1.  The  trade  acceptance  had  obtained  a  footing  with  a  number 
of  banks  and  business  houses  in  various  parts  of  the  country, 
although  terms  of  payment  were  unfavorable  in  certain  lines 
and  prevented  its  use  in  them. 

2.  Many  of  the  business  houses  favoring  the  acceptance  did  so 
chiefly  on  the  ground  that  it  afforded  a  superior  means  of 
collection. 

3.  The  line  of  credit  extended  on  trade  acceptances  as  against 
that  on  single  name  paper  appeared  to  be  lai-ger  only  in 
proportion  as  the  credit  of  acceptors  was  superior  to  that  of 
the  seller  presenting  the  acceptance  for  discount. 

4.  Preferential  rates,  from  1/4  to  1  per  cent  under  the  regular 
rate,  were  being  made  on  acceptances  by  but  few  banks, 
while  some  who  had  not  had  any  trade  acceptances  presented 
to  them,  were  willing  to  make  a  special  rate  under  suitable 
conditions. 

5.  Practically  universally  it  was  desired  to  maintain  the  cash 
discount  system.  Trade  acceptances  were  regarded  as  pri- 
marily applicable  to  accounts  taking  the  net  terms. 

6.  Business  houses  using  the  trade  acceptance  generally  sug- 
gested 3  methods  of  settlement  to  customers — cash  discount, 
trade  acceptance  or  open  account,  varying  in  degree  of  desir- 
ability in  the  order  named.  Some  finns  offered  a  discount 
smaller  than  the  cash  discount  for  trade  acceptance  settle- 
ment. 

7.  In  most  cases  where  trade  acceptances  were  requested,  the 
seller  asked  the  buyer  to  mail  him  a  trade  acceptance  direct. 

8.  Considerable    difference    of    opinion    existed    among    well- 


U8   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

informed  business  men  and  bankers  with  reference  to  the 
benefits  of  the  trade  acceptance  as  a  credit  instrument. 
9.    A  considerable  number  of  practical  and  technical  difficulties 
were  involved  in  the  use  of  the  trade  acceptance. 

Investigation  of  Park  Mathewson  in  1921. — The  latest 
survey  which  has  come  to  the  writer's  attention  is  that 
appearing  in  Chapter  XVII  of  a  work  on  Acceptances, 
Trade  and  Bankers  (New  York,  1921),  by  Mr.  Park 
Mathewson,  Vice-President  of  the  Business  Bourse  of  New 
York,  who  favors  the  acceptance.  The  results  are  sum- 
marized by  Mr.  Mathewson  as  follows: 

The  answers  indicate  that  trade  acceptances  are  being  used  suc- 
cessfully in  all  lines  of  merchandising  trade.  The  replies  show 
earnest  attention  to  the  plan  by  those  using  them,  but  do  not  show 
standardized  methods  or  results. 

In  detail,  the  results  were  as  follows : 

1.  Thirty-five  per  cent  of  reporting  firms  had  used  them,  65 
per  cent  had  not.  The  average  length  of  time  for  which 
used  was  less  than  a  year. 

2.  Ninety-four  per  cent  thought  them  advantageous,  6  per  cent 
did  not. 

3.  The  customers  of  50  per  cent  welcomed  the  trade  accept- 
ance, of  10  per  cent  resented  them  and  of  40  per  cent 
ignored  them. 

4.  Various  objections  were  given  by  customers,  and  efforts 
made  to  overcome  these  objections. 

5.  The  salesmen  of  none  of  the  firms  objected  to  the  trade 
acceptance. 

6.  The  banks  of  some  of  the  firms  opposed  the  trade  accept- 
ance, of  others  favored  them,  and  of  others  were  apathetic. 

7.  Ninety-nine  per  cent  of  the  firms  made  practically  no  objec- 
tion themselves  to  the  trade  acceptance. 

8.  None  of  the  firms  found  that  it  interfered  with  their  one 
name  paper  or  line  of  credit,  and  99  per  cent  found  that  it 
increased  their  line. 

9.  Fifty  per  cent  discounted  all  the  acceptances  they  received, 
20  per  cent  discounted  none,  10  per  cent  discounted  half,  and 
the  percentage  for  the  remainder  varied. 


EXTENT  OF  USE  OF  TRADE  ACCEPTANCE    149 

10.  Ten  per  cent  paid  an  average  rate  of  over  6  per  cent;  50 
per  cent  an  average  rate  of  6  per  cent;  10  per  cent  an 
average  rate  of  5I/2  per  cent,  and  30  per  cent  an  average 
rate  of  5  per  cent. 

11.  Sixty  per  cent  of  the  firms  had  none  returned  unpaid;  15 
per  cent  had  1  per  cent;  10  per  cent  had  from  2  to  5  per 
cent;  10  per  cent  had  2  per  cent;  5  per  cent  had  from  5 
to  10  per  cent. 

12.  Ten  per  cent  gave  no  inducement  over  the  regular  terms  to 
the  buyer  for  signing  acceptances,  while  the  concessions  of 
the  remainder  varied,  some  granting  a  discount  up  to  2  per 
cent,  and  other  extra  time  up  to  60  days,  and  some  both. 

13.  One  hundred  per  cent  found  that  accounts  were  paid 
more  promptly  with  trade  acceptances.  Sixty  per  cent 
found  that  it  saved  time  in  bookkeeping  and  95  per  cent  in 
dunning. 

14.  Ninety-five  per  cent  found  a  benefit  from  having  accounts 
in  more  liquid  form. 

15.  Only  5  per  cent  received  a  preferential  rate  on  acceptances 
over  one  name  paper,  averaging  V2  per  cent. 

16.  Practice  vai'ied  as  to  paying  their  own  bills  with  acceptances. 

17.  The  trade  associations  of  65  per  cent  favored  acceptances, 
while  those  of  the  other  35  per  cent  were  not  on  record. 

Present  Use  of  the  Trade  Acceptance. — It  is  in  order 
now  to  take  up  the  second  type  of  study  mentioned  at  the 
opening  of  the  chapter.  This  involves  an  analysis  of  the 
directions  and  the  fields  in  which  the  acceptance  has  found 
its  major  use.  It  should  be  mentioned  at  the  outset  that 
in  no  line  has  the  impetus  towards  the  use  of  the  trade 
acceptance  been  so  strong  as  to  lead  to  the  regular  use  of 
net  terms  only,  the  cash  discount  then  being  abolished  in 
the  line.  This  has  merely  been  done  by  individual  houses 
in  a  variety  of  industries,  but  in  no  one  line  can  a  marked 
tendency  in  that  direction  be  said  to  have  been  evident. 
The  trade  acceptance  has  thus  been  introduced  alongside 
of,  and  as  an  adjunct  to,  the  existing  cash  discount  system, 
and  has  been  subject  to  all  the  limitations  of  introduction 
in  such  a  manner.     It  has  also  been  used  primarily  by 


150   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

manufacturers,  for  the  leading  wholesale  lines  have  gen- 
erally been  strongly  opposed  to  it,  although  the  Southern 
Wholesale  Dry  Goods  Association  in  1918,  adopted  a  reso- 
lution in  favor  of  it,  and  the  National  Hardware  Association 
distributed  considerable  literature  relative  to  it.  Especially 
is  this  the  case  where  the  terms  themselves  usually  are 
short  and  where  great  emphasis  has  been  placed  upon  the 
cash  discount  in  connection  with  the  wholesalers'  purchases, 
as  in  the  case  of  groceries.  On  the  other  hand,  in  whole- 
sale lines  where  terms  are  longer,  and  in  which  consider- 
able trading  occurs,  such  as  the  textiles,  the  opposition  is 
not  nearly  so  strong,  and  the  instrument  is  more  often 
used.  Some  houses  in  each  of  the  other  lines  mentioned, 
it  is  true,  have  also  used  it,  but  they  form  onlj'  a  small 
minority.  As  has  already  been  indicated,  the  wholesalers, 
in  general,  place  leading  emphasis  on  the  cash  discount, 
and  at  least  on  this  ground  are  suspicious  of  the  trade  ac- 
ceptance. This  means  also  that  the  trade  acceptance  is  not 
used  on  sales  to  them,  especially  as  they  are  supposed  to 
discount  their  bills.  It  is  primarily  used  by  manufacturers 
on  sales  to  other  manufacturers,  retailers,  or  industrial 
consumers. 

Within  this  field  of  possible  use,  certain  other  limitations 
are  found.  The  trade  acceptance  is  generally  not  found 
where  terms  are  very  short — one  month  or  less,  although 
some  30-day  trade  acceptances  are  used,  such  as  on  flour  in 
the  Southeast,  and  on  jobbers'  sales  of  electrical  products. 
Moreover,  the  trade  acceptance  is  not  used  where  invoices 
are  very  small,  unless  they  are  grouped  and  one  trade 
acceptance  given  for  purchases  made  during  the  preceding 
week,  fortnight  or  month.  The  instrument  is  then  gen- 
erally found  where  the  terms  are  medium  to  long,  and  bills 
are  fair-sized.  Finally,  the  trade  acceptance  appears  as  a 
result  of  dissatisfaction  with  the  existing  practice  of  hav- 
ing the  net  terms  run  on  open  account.    It  generally  makea 


EXTENT  OF  USE  OF  TRADE  ACCEPTANCE    151 

its  appearance  either  as  a  means  of  prompter  collection 
from  the  poorest  accounts,  appearing  alongside  the  open 
account,  or,  in  other  lines  where  such  abuse  is  widespread, 
as  a  general  means  of  covering  the  accounts  taking  the  net 
terms.    In  either  case,  the  purpose  is  the  same. 

These  factors  indicate  the  general  lines  along  which  trade 
acceptance  development  has  proceeded.  In  the  past,  the 
acceptance  had  already  been  used  in  certain  lines  where 
terms  were  rather  long,  such  as  for  leaf  tobacco,  the  cheaper 
domestic  cigars  and  jewelry.  In  some  of  these  lines  part 
of  the  buyers  were  often  granted  open  account  terms,  while 
the  remainder  gave  either  an  acceptance  or  else  a  note. 
Much  of  the  current  use  of  the  acceptance  in  other  lines 
has  been  in  the  same  general  manner — as  a  collection  instru- 
ment on  that  part  of  the  accounts  of  a  firm  which  might 
be  slow  if  allowed  to  run  on  open  account.  Many  manu- 
facturers, for  example,  of  metal  products,  have  sought  to 
introduce  it  in  this  way  on  some  of  their  accounts.  Some 
leading  authorities  estimate  that  at  least  90  per  cent  of  the 
acceptances  now  in  use  are  employed  as  collection  instru- 
ments. 

In  other  lines,  the  introduction  of  the  acceptance  has 
been  advocated  in  connection  with  a  desire  to  substitute 
embodied  for  unembodied  credit  in  the  case  of  all  those 
who  take  the  net  terms  in  the  industry  in  question.  Manu- 
facturers of  agricultural  implements  have  for  some  years 
urged  dealers  to  obtain  paper  from  customers,  and  their 
own  terms  in  turn  call  for  paper  where  their  bills  are  not 
discounted.  At  first  the  note  was  advocated  for  this  pur- 
pose, but  more  recently  the  trade  acceptance  has  been 
favored.  Another  illustration  of  this  desire  to  use  em- 
bodied in  place  of  unembodied  credit  in  the  case  of  all 
those  accounts  which  take  the  net  terms,  is  found  in  the 
lumber  industry,  both  as  between  manufacturers  and 
wholesalers,  and  as  between  wholesalers  and  retailers. 


152  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Finally  another  field  of  use  for  the  trade  acceptance  has 
been  opened  in  connection  with  season  datings.  Here  the 
purpose  is  not  to  introduce  greater  definiteness  into  the 
obligation  of  buyer  to  seller,  but  rather  to  give  the  seller 
a  specific  instrument  evidencing  the  transaction.  Under 
such  conditions  the  acceptance  does  not  embody  only  the 
credit  of  the  inferior  accounts,  but  includes  the  first  class 
accounts  as  well.  Most  conspicuous  among  these  lines  has 
been  automobile  tires,  where  the  acceptance  has  been  used 
in  connection  with  spring  payment  for  winter  shipments. 
Terms  on  subsequent  current  shipments  are,  however,  5  per 
cent  10th  proximo.  No  acceptance  is  used  on  them  at  all, 
but  they  run  entirely  on  open  account. 


CHAPTER  IX 

THE  NET-TERMS  SYSTEM  VERSUS  THE  CASH-DISCOUNT  SYSTEM 
— CREDIT  ASPECTS 

In  considering  the  commercial  credit  system  critically, 
and  contrasting  existing  practice  with  the  trade  acceptance 
plan  which  has  been  proposed,  it  is  necessary  to  keep  clearly 
in  mind  the  real  problems  involved.  Much  misconception  ex- 
ists as  to  the  trade  acceptance,  and  many  of  the  discussions, 
both  by  those  in  favor  and  those  opposed,  have  this  defect 
in  common.  In  fact,  it  wdll  shortly  be  seen  that  the  trade 
acceptance  is  not  a  fundamental  element  in  the  situation, 
but  that  the  underlying  distinction  is  quite  different.  The 
contrast  is  actually  between  a  system  in  which  net  terms 
alone  are  found,  and  one  in  which  they  exist  in  conjunction 
with  a  cash  discount.  Furthermore,  the  issue  is  by  no 
means  clear  cut.  Each  system  has  certain  advantages  and 
likewise  certain  disadvantages.  That  is  to  say,  each  system 
is  peculiarly  adapted  to  certain  conditions,  at  the  same 
time  that  it  is  less  suited  to  other  conditions.  This  suggests 
the  desirability  of  directing  the  analysis  toward  a  careful 
examination  of  the  real  field  of  use  of  each,  instead  of  an 
attempt  at  too  sweeping  generalization.  Neither  system  is 
wholly  good  nor  wholly  bad. 

Alternative  Systems  of  Finance. — It  is  desirable  at  the 
outset  to  indicate  clearly  the  contrast  between  the  several 
systems  of  commercial  credit  and  finance  which  may  be 
employed.  In  doing  this,  certain  of  the  points  already 
mentioned  at  various  places  in  the  book  will  be  recalled. 
As  has  just  been  stated,  the  actual  contrast  is  not  accord- 

153 


154   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

ing  to  the  form  of  obligation  existing  between  buyer  and 
seller,  or  between  either  of  them  and  the  bank.  This  is 
quite  secondary  to  the  distinction  according  to  the  time 
granted  the  buyer  by  the  seller.  In  other  words,  with  a 
system  in  which  net  terms  alone  are  quoted,  is  to  be  con- 
trasted a  system  in  which  several  options  are  given,  namely 
payment  net  at  the  close  of  a  certain  period,  or  payment 
at  the  close  of  one  or  more  shorter  periods,  in  which  case 
specified  discounts  may  be  deducted.  Under  the  one  sys- 
tem, for  example,  terms  will  be  net  60  days;  under  the 
other,  2  per  cent  10  days,  net  60  days  or  less  often  2  per 
cent  10  days,  1  per  cent  30  days,  net  60  days.  These  two 
systems  may  conveniently  be  called  respectively  the  net- 
terms  and  the  cash-discount  systems. 

Not  only  does  this  raise  the  question  of  credit  arrange- 
ments between  buyers  and  sellers  of  goods,  but  it  also  raises 
broacfer  questions  of  finance  in  general.  These  questions 
include  the  relation  of  both  buyer  and  seller  to  the  bank, 
and  the  problem  how  the  paper  representing,  either  directly 
or  indirectly,  funds  supplied  for  the  transaction,  gets  into 
the  bank.  Under  the  net-terms  system,  the  seller  carries 
the  buyer,  and  supplies  the  funds  involved.  Presumably 
he  does  this,  and  his  net  terms  run,  for  a  period  of  time 
equal  to  the  buyer's  marketing  period.  The  seller  then 
borrows  in  turn  from  his  bank  in  order  to  obtain  these 
funds.  He  may  do  this  either  directly  on  his  receivables, 
or  merely  on  the  basis  of  his  general  statement,  of  which 
the  receivables  become  an  integral  part.  In  any  event,  he 
has  a  specific  body  of  receivables  which  he  in  effect  is 
able  to  shift  in  some  measure  to  the  bank. 

With  the  cash-discount  system,  the  situation  is  some- 
what different.  Those  accounts  which  do  not  take  the 
discount  are  financed  through  the  seller  in  the  manner 
just  indicated.  But,  inasmuch  as  the  cash  discount  ex- 
ceeds the  current  rate  of  interest,  it  is  profitable  for  the 


NET-TERMS  SYSTEM— CREDIT  ASPECTS   155 

buyer,  wherever  possible,  to  take  the  discount.  This  means 
that,  -where  his  own  funds  are  insufficient,  he  will,  if  pos- 
sible, borrow  from  his  bank,  in  order  to  take  the  dis- 
count. This  he  will  do  on  the  basis  of  his  general  position. 
Under  the  cash-discount  system,  buyers  are  therefore 
divided  into  two  classes,  which  are  financed  in  different 
ways.  A  select  part  are  financed  directly  at  their  own 
banks,  while  the  remainder  are  financed  through  the  sellers 
at  the  sellers'  banks. 

The  Net-Terms  System  and  the  Trade-Acceptance  Sys- 
tem.— The  cash-discount  period  is  usually  short,  and  no 
special  paper  is  used  in  connection  with  it.  The  net-terms 
period  fs  longer,  and  several  alternatives  exist.  The  credit 
may  be  either  unembodied  and  run  on  open  account,  or 
may  be  embodied  in  the  sense  of  being  represented  by  a 
specific  credit  instrument.  This  may  be  either  a  note  of 
the  buyer  or  a  trade  acceptance,  both  being  substantially 
similar  from  this  point  of  view,  in  spite  of  their  other 
differences.  Where  the  trade  acceptance  is  used  in  this 
way  as  an  adjunct  to  a  cash-discount  system,  it  embodies 
inferior  credit.  The  best  accounts  borrow  from  their  banks, 
and  discount  their  bills,  while  the  poorer  accounts  who 
either  cannot  borrow  or  else  have  already  obtained  their 
full  line  of  credit  from  their  banks,  give  trade  acceptances. 
But  if  a  trade  acceptance  is  to  represent  the  best  paper, 
the  best  accounts  must  not  be  given  the  opportunity  to 
borrow  directly  from  their  own  banks.  They  must  there- 
fore be  quoted  only  net  terms,  the  same  as  the  other 
accounts.  That  is  to  say,  if  the  trade  acceptance  is  to  be  a 
first  class  instrument,  the  trade-acceptance  system  must 
mean  a  system  in  which  net  terms  alone  are  quoted.  In 
short,  with  the  cash-discount  system  is  to  be  contrasted 
the  net-terms  system.  The  question  then  practically  be- 
comes this:  should  we  have  a  cash  discount,  or  should  we 
not? 


156    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

The  fact  that  the  trade  acceptance  may  be  used  in  the  two 
ways  just  indicated  has  caused  much  confusion  in  current 
discussion.  The  advocates  of  the  cash-discount  system  call 
attention  to  the  points  just  mentioned.  On  the  other  hand, 
advocates  of  the  trade  acceptance  have  often  contended 
that  there  is  no  essential  antagonism  between  it  and  tlie 
cash  discount.  "No  foundation  can  be  discovered  for  this 
fear, ' '  said  the  Board  of  Directors  of  the  National  Associa- 
tion of  Credit  Men  at  its  annual  meeting  in  Atlantic  City 
in  September,  1918,  "for  sales  terms  are  not  changed  by 
the  use  of  the  acceptance,  but  it  is  merely  an  acknowledg- 
ment of  the  obligation."  This  is  true  only  if  the  require- 
ment that  the  trade  acceptance  be  first-class  paper  is 
waived.  The  acceptance  is  then  used  primarily  as  a  col- 
lection instrument,  and  as  such  is  to  be  contrasted  with 
the  open  account.  Trade-acceptance  advocates  in  fact  are 
fond  of  drawing  this  contrast.  They  compare  the  trade- 
acceptance  system  with  the  open-account  system,  while 
opponents  on  the  other  hand  compare  it  with  the  cash- 
discount  system.  In  other  words,  each  group  tends  to 
adopt  a  different  point  of  view,  and  to  stress  a  different 
phase. 

The  Problems  Involved. — Much  of  the  literature  for  and 
against  the  trade  acceptance  is  addressed  directly  to  the 
business  man,  and  is  designed  to  convince  him  that  he 
should  either  use  or  oppose  the  instrument.  Data  of  this 
kind  naturally  base  their  appeal  upon  those  considerations 
which  most  directly  affect  him,  and  thus  make  much  of 
arguments  that  are  by  no  means  fundamental.  These  argu- 
ments are  usually  listed  in  more  or  less  parallel  column 
fashion.  Without  disparaging  in  the  least  the  value  of 
work  of  this  kind,  it  is  necessary  for  the  present  purpose 
to  approach  the  matter  somewhat  differently.  A  broader 
point  of  view  must  be  adopted  than  that  of  the  individual 
business  man  and  his  immediate  self-interest.    The  various 


NET-TERMS  SYSTEM— CREDIT  ASPECTS     157 

aspects  which  the  two  systems  of  finance  involve  must  be 
considered,  and  the  tests  which  they  should  meet. 

Fundamental  Tests. — The  initial  point  which  should  be 
kept  in  mind  is  this:  the  problem  is  a  minimal  one — the 
maximum  of  efficiency  at  the  minimum  of  cost.  This  does 
not  mean  that  the  best  system,  irrespective  of  cost,  nor  the 
cheapest  system,  irrespective  of  efficiency,  is  desired.  It 
requires  a  system  which  functions  or  does  the  work  satis- 
factorily at  reasonable  cost  or  expense.  This  system,  more- 
over, need  not  be  the  same  under  all  conditions;  what  is 
best  under  one  set  of  circumstances  may  be  worst  under 
another. 

But  what  work  should  the  system  do?  1.  It  should  pro- 
vide an  efficient  and  economical  means  of  credit  extension. 
Each  individual  should  receive  the  amount  of  credit  to 
which  he  is  entitled,  and  which,  when  granted,  will  enable 
the  economic  system  to  operate  satisfactorily,  and  he  should 
receive  this  credit  for  a  length  of  time  sufficient  for  his 
operations.  This  naturally  involves  several  auxiliary  ques- 
tions. What  agency  should  directly  measure  the  credit, 
and,  inasmuch  as  the  bank  in  last  analysis  supplies  all  the 
funds  involved,  what  method  of  credit  measurement  should 
it  employ?  In  addition  to  matters  connected  with  the 
granting  of  credit,  it  also  involves  the  termination  of  credit 
arrangements — the  liquidation  of  the  credit  at  the  close  of 
the  period  for  which  it  is  extended. 

In  performing  its  service  in  connection  with  the  granting 
and  terminating  of  credit,  the  system  should  foster  efficient 
and  economical  business  practice  on  the  part  of  the  com- 
munity. It  should  also  not  bring  undesirable  events,  such 
as  price  changes,  in  its  wake.  These  aims  will  be  achieved 
by  an  efficient  credit  system,  but  incompetence  will  lead 
to  undesirable  consequences  along  these  two  lines. 

2.  The  system  should  be  such  as  to  permit  efficient  antl 
economical   operation  of  the  banking  system.    Questions 


158    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

auxiliary  hereto  concern  the  relation  which  prevails  be- 
tween the  borrower  and  the  bank,  and  the  paper  which  the 
banking  system  and  the  open  market  receive.  These  mat- 
ters relate  solely  to  the  banking  system,  and  treat  the 
problem  from  that  point  of  view,  instead  of  being  con- 
cerned with  the  general  credit  aspects  indicated  under  the 
first  head. 

It  should  be  emphasized  that  in  applying  these  tests, 
standards  or  criteria,  whichever  they  may  be  termed,  the 
operation  of  a  system  wherein  net  terms  alone  are  found 
should  be  contrasted  with  one  in  which  both  a  cash  dis- 
count and  net  terms  are  found.  It  is  important  to  remem- 
ber that  in  the  latter  system  financing  occurs  in  two  ways. 
This  system  is  actually  neither  a  cash-discount  system  nor 
a  net-terms  system,  but  a  coml)i'nation  of  both.  This  com- 
hination  is  to  be  contrasted  with  a  system  in  which  net 
terms  alone  are  found. 

Agency  for  Credit  Measurement. — As  already  indi- 
cated, under  a  net-terms  system,  the  seller  directly  measures 
the  credit  of  the  buyer  of  merchandise.  Uader  a  cash-dis- 
count system,  the  same  is  true  with  those  buyers  who  do 
not  discount  their  bills,  but  the  bank  measures  the  credit 
of  those  buyers  who  borrow  from  it  in  order  to  take  the 
discount.  Where  a  cash-discount  system  prevails,  buyers 
are  therefore  divided  by  means  of  the  discount  into  two 
classes.  The  credit  of  each  class  is  measured  by  a  different 
agency — the  bank  for  the  best  accounts  who  discount  their 
bills,  and  the  seller  for  the  poorer  accounts  who  do  not 
discount,  and  who  have  been  recognized  by  the  bank  as 
not  worthy  of  credit  from  it.  But  the  seller  in  turn  finds 
it  necessary  to  borrow  in  order  to  enable  him  to  carry  these 
accounts.  To  the  extent  that  he  does  this,  his  bank  in 
turn  measures  the  credit.  It  considers  the  receivables 
which  he  possesses  either  specifically  or  as  part  of  his  gen- 
eral assets,  and  to  a  greater  or  lesser  degree  checks  the 


NET-TERMS  SYSTEM— CREDIT  ASPECTS   159 

credit  which  he  has  previously  granted.  Under  a  cash- 
discount  system,  therefore,  the  buyers'  local  banks  measure 
the  credit  of  part  of  the  buyers,  and  the  seller,  checked  in 
turn  to  some  degree  by  the  seller's  own  bank,  that  of  the 
remainder.  Under  a  net-terms  system,  the  second  method 
of  course  prevails  on  all  the  accounts.  The  situation  may 
be  summarized  as  follows : 

Net-terms  system 

Seller  measures  credit  of  buyer 
Seller's  bank  rechecks 
Cash-discount  system 
Local   bank   separates    accounts   into   two 

classes — best  and  poorer. 
Best  accounts 

Local  bank  measures  credit  of  buyer 
Poorer  accounts 

Same  method  as  under  net-terms  system 

These  considerations  naturally  raise  the  question :  who  is 
better  fitted  to  measure  the  credit — the  seller  and  indi- 
rectly the  seller's  own  bank,  or  the  local  bank  of  the  buyer? 
It  should  be  noted  that  the  contrast  is  of  more  limited 
applicability  than  is  often  implied  by  writers  on  the  sub- 
ject, who  ignore  the  fact  that  under  the  cash  discount 
system  the  local  bank  measures  the  credit  of  only  pari  of 
the  buyers.  Moreover,  even  granting  that  the  local  bank 
were  a  better  judge  of  credit  than  the  seller,  it  exercises  its 
judgment  only  on  the  best  accounts.  The  seller  is  left  to 
exercise  his  judgment  on  the  poorer  accounts,  and  in  effect 
to  guarantee  them  to  the  bank,  exactly  as  is  the  case  on  all 
accounts  under  the  net  terms  system.  In  other  words, 
precisely  where  expert  judgment  is  most  needed,  the  cash 
discount  system  fails  to  apply  it.  The  advantage  which 
it  affords  to  the  seller  is  derived  and  secondary.     He  is 


160    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

relieved  of  the  credit  work  on  part  of  his  accounts,  and  is 
thus  enabled  to  concentrate  his  attention  upon  the  poorer 
buyers.  This  relieves  him  of  some  risk  and  expense,  and 
may  tend  to  reduce  his  bad  debt  loss.  The  importance  of 
this  factor  will  vary  greatly  as  between  different  industries, 
but  in  any  event  the  considerations  noted  serve  to  indicate 
the  limits  which  exist  to  the  usefulness  of  the  cash-discount 
system. 

Relative  Merit  of  Seller  and  Bank. — The  question 
remains  whether  the  bank  is  a  better  judge  of  credit  than 
is  the  seller.     This  raises  the  question  whether  the  credit 


SHOES         GROCEPIE.S      HAROWAWE 


CREDIT 

SALE  AND 
SHIPMENT 

STOCKING 
PURCHASE 


1                   1    ,    ".             1  .•..-,• 

.-.Ir       ,.J 

•  •  •  .1  • 

, «  •    •    • 

'«•»•• 

^^^^^M^ 

^ 

,-->.---_--^_'i^iii 

«     *      •     •     «      •     * 

problems  of  individual  industries  may  be  separated  from 
the  manufacturing  and  merchandising  problems  and  given 
over,  or  at  least  the  larger  part  of  them,  to  the  bank.  The 
wholesale  shoe,  grocery  and  hardware  businesses  must  all 
purchase  certain  merchandise,  keep  it  in  stock,  sell  and 
ship  it  out,  and  extend  credit  to  those  to  whom  they  sell. 
Other  industries,  both  manufacturing  and  wholesale,  are 
confronted  with  similar  merchandising  and  credit  problems. 
Are  the  credit  problems  which  individual  business  houses 
throughout  the  economic  system  as  a  whole  face,  so  similar 
as  to  render  it  possible  to  take  a  cross  section  through  the 
economic  system  and  segregate  these  problems?    If  this  is 


NET-TERMS  SYSTEM— CREDIT  ASPECTS   161 

not  so,  are  the  credit  problems  which  the  grocer  faces  in- 
stead first  and  foremost  matters  pertaining  to  the  grocery 
business,  and  only  secondarily,  credit  problems  allied  to 
the  credit  problems  found  in  other  lines?  In  other  words, 
is  the  cleavage  in  the  figure  opposite  vertical  or  hori- 
zontal ? 

It  has  been  argued  ^  that  under  the  modern  division  of 
labor,  production  is  localized,  but  industry  is  on  a  large 
scale,  and  therefore  credit  should  be  specialized  and  placed 
in  the  hands  of  experts  in  this  particular  field.  This  raises 
a  question  similar  to  that  just  indicated,  namely,  which 
direction  should  specialization  take?  Should  the  credit 
problems  in  the  grocery  business  be  handled  by  those  who 
are  primarily  specialists  in  that  business,  or  by  those  who 
are  primarily  specialists  in  credit  ?  This  is  largely  a  matter 
of  the  size  of  the  particular  bank  in  any  given  case.  The 
credit  department  of  a  large  bank,  with  its  staff  of  special- 
ists in  individual  industries,  will  naturally  be  in  a  good 
position  to  deal  with  such  matters.  The  small  local  bank, 
however,  with  its  staff  required  to  follow  conditions  simul- 
taneously in  a  great  number  of  lines,  may  well  be  much  less 
favorably  situated  than  are  the  credit  departments  of 
houses  in  particular  industries.  Especially  is  this  point  of 
importance  because  of  the  significance  frequently  attached 
to  having  the  local  bank  measure  the  credit,  as  will  be  indi- 
cated below.  The  bank,  however,  in  any  case  has  a  specific 
advantage  in  that  it  is  a  disinterested  party,  and  as  such 
will  be  free  from  the  natural  bias  of  the  seller  to  increase 
as  much  as  possible  the  credit  granted,  in  order  to  stimulate 
sales. 

Checking  of  Credit  by  the  Local  Bank. — A  fur- 
ther problem  to  be  considered  is  the  location  of  the 
agency  measuring  the  credit,  or,  as  it  is  often  called,  the 
location  of  the  financing.     This  involves  a  comparison  of 

*  Agger,  ' '  Trade  Acceptances  Versus  Bankers '  Acceptances. ' ' 


162   THE  MECHANISM  OP  COMMERCIAL  CREDIT 

the  relative  merits  of  the  buyer's  local  bank  and  of  the 
seller.  The  argument  in  favor  of  the  local  bank  proceeds 
along  two  lines.  First,  attention  is  given  to  what  are 
regarded  as  fundamental  economic  factors.  Attention  is 
turned  from  recipients  and  grantors  of  credit  to  what  is 
conceived  to  be  the  ultimate  purpose  of  commercial  credit. 
This,  it  is  said,  is  to  finance  the  flow  of  commodities  from 
producer  to  consumer.  The  final  test  of  commercial  credit 
in  any  given  industry  is  therefore  consumer's  demand  for 
the  commodity  in  question.  This,  it  is  held,  can  really 
only  be  ascertained  locally,  and  the  local  bank  is  the  proper 
agency  for  this  purpose.  It  knows  its  local  needs  better 
than  any  outsider.    Hence  it  should  measure  credit,^ 

The  second  line  of  argument  considers  recipients  and 
grantors  of  credit.  Attention  is  called  to  the  size  of  the 
country,  and  the  distance  which  often  intervenes  between 
buyer  and  seller.  This,  it  is  said,  makes  it  difficult  for 
small  sellers  to  obtain  accurate  and  reliable  data  on  credit 
and  market  conditions,  so  that  they  actually  sell  to  un- 
known buyers  in  unknown  markets.  Local  measurement  of 
credit  is  preferable  in  such  cases,  and  should  be  performed, 
it  is  held,  by  the  local  bank. 

Consider  these  two  arguments  in  turn.  The  first  thing 
to  note  is  the  restricted  applicability  of  the  argument  for 
checking  the  credit  at  the  point  of  consumption.  It  relates 
only  to  credit  extended  to  retailers  of  goods  intended  for 
everyday  use.  Articles  such  as  machinery,  which  are  used 
by  the  buyer  as  fixed  capital  goods,  are  generally  sold  by 
the  manufacturer  direct  to  the  user.    Either  may  be  located 

*  Local  financing  is  also  advocated  for  another  reason.  It  is  said 
that  goods  should  be  financed  at  the  point  where  they  are  located,  in 
order  that  proper  supervision  of  the  basis  of  the  credit  may  be  ob- 
tained. This  cannot  be  had,  it  is  claimed,  where  a  seller  in  one  place 
by  selling  on  time  grants  credit  to  a  buyer  located  elsewhere,  who 
holds  the  goods.  If  the  community  needs  more  funds  than  it  itself 
can  supply,  they  should  be  obtained  by  its  banks,  and  not  by  its 
business  houses. 


NET-TERMS  SYSTEM— CREDIT  ASPECTS   163 

at  any  place  whatsoever,  and  the  question  of  local  retailing 
does  not  enter.  Furthermore,  in  the  ease  of  ordinary  goods, 
only  the  test  of  anticipated  demand  by  retailers  and  ulti- 
mately by  consumers,  can  be  applied  to  manufacturers  and 
wholesalers  who  are  found  in  intermediate  stages  of  the 
economic  process,  instead  of  in  the  last  stage,  as  is  the 
retailer.  The  manufacturer's  or  wholesaler's  local  bank 
certainly  cannot  be  said  to  be  in  an  especially  favorable 
situation,  by  virtue  of  its  location,  for  knowing  what  the 
demand  for  his  goods  will  be  in  the  entire  territory  he 
covers.  Yet  provision  must  be  made  for  checking  the  manu- 
facturer's  and  wholesaler's  credit  and  operations;  no  credit 
test  can  be  deferred  until  the  goocTs  are  on  the  point  of 
being  consumed.  In  other  words,  analysis  of  fundamental 
factors  needs  to  be  supplemented,  in  any  event,  by  analysis 
of  the  actual  credit  mechanism  which  exists — the  credit 
recipients  and  grantors  throughout  the  economic  process. 
In  fact,  in  the  entire  process  of  credit  analysis,  primary 
attention  must  be  given  to  this  credit  mechanism.  The 
more  abstract  analysis  serves  rather  as  a  supplement  than 
as  a  substitute.  This  throws  us  back  upon  the  type  of 
analysis  made  on  page  161.  The  relative  status  of  seller, 
buyer  and  bank  must  be  considered.  In  doing  this,  gen- 
eralization is  of  little  aid.  For  example,  in  a  general  way, 
the  bank  is  in  a  better  position  to  measure  local  consump- 
tion of  goods,  as  well  as  the  buyer's  net  worth  and  general 
solvency.  On  the  other  hand,  the  seller  is  in  a  better  posi- 
tion to  judge  the  buyer's  business  methods  and  operations. 
In  short,  there  is  little  clear-cut  advantage  on  the  side  of 
either  seller  or  local  bank.  Detailed  analysis  is  required. 
The  need  for  this  is  borne  out  by  the  fact  that  the  other 
arguments  in  favor  of  local  checking  of  credit  are  valid 
only  under  specified  conditions.  The  point  made  in  the 
footnote  on  page  162  that  goods  should  be  financed  at  the 
point  where  they  are  located,  applies  only  in  the  case  of 


164    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

retailers,  and  certainly  cannot  be  held  to  relate  to  large 
firms  floating  their  paper  in  the  open  market.  Moreover, 
referring  to  the  second  line  of  argument  given  on  that  page, 
it  should  not  be  difficult  for  well-organized  firms  covering 
intensively  a  certain  district,  to  obtain  data  on  credit  and 
market  conditions,  and  this  would  appear  to  be  a  serious 
handicap  only  to  small  sellers  whose  energies  were  scat- 
tered over  a  wide  territory. 

Analysis  of  Types  of  Industries. — Actual  condi- 
tions vary  greatly  in  different  industries.  This  detailed 
analysis,  therefore,  should  take  the  form  of  examin- 
ing more  closely  the  specific  conditions  which  may  be  found 
on  the  industrial  side.  Difficulty  in  measuring  credit  arises 
in  connection  with  small  buyers,  especially  if  located  at 
points  far  removed  from  the  seller.  This,  on  the  one  hand, 
is  a  problem  of  obtaining  credit  and  market  information, 
and  on  the  other,  a  problem  of  the  degree  of  risk  involved 
in  credit  relations  with  the  buyers  in  the  industry  in  ques- 
tion. In  certain  lines,  such  as  jewelry  and  furs,  the  credit 
risk  is  great,  and  these  call  for  different  treatment  than 
do  less  competitive  lines  having  buyers  whose  standing  on 
the  whole  is  better.  For  this  reason,  it  will  be  well  to 
classify  industries  further  according  to  the  general  status 
of  buyers  and  sellers.  In  this  four-fold  classification,  the 
words  poor  and  small  are  used  interchangeably  to  denote 
the  less  desirable  credit  risks. 

1.  Poor  seller — poor  buyer 

2.  "         '*    —good       " 

3.  Good  seller — good  buyer 

4.  "         "    —poor       '' 

Each  of  these  cases  should  be  analyzed  separately  in  turn, 
as  each  requires  distinctive  treatment.  Moreover,  under 
the  system  now  found  in  the  United  States,  attempt  is 
specifically  made  to  treat  each  group  according  to  its  par- 


NET-TERMS  SYSTEM— CREDIT  ASPECTS    165 

ticular  requirements,  and  to  adapt  the  methods  of  credit 
measurement  to  the  actual  needs  of  the  case.  The  poor 
seller  is  presumably  ill-informed  and  therefore,  on  the 
whole,  incompetent  to  attend  satisfactorily  to  credit  meas- 
urement. In  ease  1,  it  is  well,  in  addition^  because  of  the 
fact  that  the  buyer  is  also  poor,  to  have  as  much  of  the 
credit  as  possible  checked  at  once  by  the  bank,  and  hence 
a  cash  discount  is  desirable.  Where  the  buyer  is  good, 
however,  as  in  case  2,  a  cash  discount  is  also  to  be  favored, 
but  on  somewhat  different  grounds.  Cash  payment  and 
hence  shift  of  the  credit  period  from  between  buyer  and 
seller  to  between  buyer  and  bank,  is  desirable  in  some  lines, 
in  order  to  enable  a  seller  who  is  not  in  a  position  to  attend 
to  extension  of  credit,  to  relieve  himself  of  the  task.  Fur- 
thermore, from  the  point  of  view  of  economy  it  is  desirable 
to  have  the  better  party  to  a  transaction,  in  this  case  the 
buyer,  apply  directly  to  the  bank,  instead  of  having  a  larger 
number  of  weaker  sellers  do  so.  This  point  was  fully  dis- 
cussed in  Chapter  III,  where  the  case  of  sales  of  agri- 
cultural produce,  with  their  disproportion  in  economic 
strength  between  buyer  and  seller,  was  cited. 

Where  both  parties  are  good,  as  in  case  3,  it  is  really 
immaterial  whether  the  bank  or  the  seller  measures  the 
credit.  In  such  lines,  however,  cash  discounts  often  tend 
towards  a  minimum,  or  are  eliminated,  while  the  net  terms 
themselves  in  many  cases  are  short.  Finally,  where  buyers 
are  poor,  but  sellers  are  good,  as  in  case  4,  it  may  never- 
theless be  desirable  to  employ  a  cash  discount  in  order  to 
reduce  the  credit  work.  Especially  will  this  be  true  in  some 
lines,  such  as  the  wholesale  hardware  business,  where  those 
who  discount  their  bills,  those  who  pay  promptly  at  the 
net  maturity  and  those  who  run  past  due,  are  constantly 
changing  and  overlapping,  so  that  at  time  of  shipment  it  is 
not  known  positively  to  which  class  the  customer  will  be- 
long at  time  of  payment.    Moreover,  the  generalization  may 


166   THE  MECHANISM  OF  COMMERCIAL  CEEDIT 

safely  be  made,  that  in  actual  practice  the  longer  the  net 
terms  and  the  greater  accordingly  the  risk,  other  things 
being  equal,  the  more  certain  there  is  to  be  a  cash  discount 
quoted. 

These  considerations  apply,  of  course,  to  individual  cases 
within  any  given  industry,  as  well  as  to  entire  industries 
as  a  whole.  But  the  important  point  for  our  purpose  is  the 
fact  that  under  the  existing  system  in  the  United  States, 
attempt  is  specifically  made  to  vary  the  manner  of  credit 
measurement  and  finance  according  to  the  needs  of  the  par- 
ticular situation.  This  represents  a  decided  step  in 
advance,  and  we  must  conclude  that  from  the  point  of  view 
of  the  agency  which  measures  the  credit,  no  general  net- 
terms  system  would  be  desirable,  any  more  than  would  a 
system  calling  exclusively  for  cash  payments  between  buyer 
and  seller. 

Method  of  Credit  Measurement  by  the  Bank. — It  is 
often  assumed  that  the  method  of  credit  measurement  em- 
ployed by  the  bank  varies  according  to  the  system  of 
commercial  credit  and  finance  which  is  employed.  In  last 
analysis,  the  bank  supplies  the  funds  which  are  obtained 
by  buyers  of  merchandise,  either  directly,  or  else  indi- 
rectly through  advancing  them  to  sellers  who  in  turn  carry 
buyers.  Our  second  question  in  contrasting  the  net-terms 
and  the  cash-discount  systems,  therefore,  relates  to  the 
methods  which  the  bank  employs  in  measuring  credit  when 
it  is  engaged  in  this  process.  Under  the  cash-discount 
system,  those  buyers  who  take  the  discount  borrow  directly 
from  the  bank,  receiving  a  line  of  credit  from  it  on  the 
basis  of  their  general  position.  For  those  accounts  which 
do  not  take  the  discount,  and  in  cases  where  net  terms 
exclusively  are  used,  the  seller  first  measures  the  buyer's 
credit,  and  this  is  not  rechecked  or  considered  by  the  bank 
to  any  great  extent  unless  the  buyer's  name  is  notably 
stronger  than  the  seller's.     The  bank  is  also  dependent 


NET.TERMS  SYSTEM— CREDIT  ASPECTS   167 

chiefly  upon  the  seller  for  information  as  to  the  buyer. 
Where  the  credit  is  embodied  in  a  note  or  trade  acceptance, 
much  greater  consideration  is  naturally  possible  than  where 
it  remains  unembodied  in  an  open  account. 

In  current  discussion  it  is  often  stressed  that  the  trade 
acceptance  is  tied  to  a  specific  transaction,  and  this  would 
of  course  be  true  of  all  the  receivables  were  a  net  terms 
system  alone  employed.  It  is  held  that  this  fact  makes 
possible  a  different  basis  for  and  method  of  credit  measure- 
ment. While  there  may  be  some  tendency  in  this  direction, 
the  use  of  the  net-terms  system,  whatever  the  form  of  the 
receivables,  does  not  specifically  call  for  a  particular  system 
of  credit  measurement.  The  seller  may  hold  the  receivables 
himself  and  borrow  from  the  bank  on  the  basis  of  his  gen- 
eral position  under  the  line-of -credit  system,  in  the  same 
manner  as  does  the  buyer  who  wishes  to  take  a  cash  dis- 
count. Moreover,  at  the  present  time  the  customary  prac- 
tice for  the  bank  is  actually  to  fix  a  line  of  credit  for  the 
seller  who  presents  receivables,  just  as  if  he  did  not  present 
them. 

This  fact  means  that,  when  taken  alone,  the  specific 
transaction  affords  an  inadequate  basis  for  credit  measure- 
ment. It  is  necessary  under  any  system  of  credit  extension 
to  record  the  total  amount  of  credit  which  each  individual 
receives,  in  order  to  insure  that  the  amount  is  not  excessive. 
A  record  of  this  kind  is  already  provided  where  a  line-of- 
credit-system  is  used,  and  would  have  to  be  specially  kept, 
were  attempt  made  to  use  the  specific  transaction  system. 
In  this  case  the  line-of-credit  plan  would  serve  as  an 
adjunct  to  the  specific  transaction  method,  and  a  two-fold 
system  would  be  required. 

Furthermore,  it  should  be  remembered  that  the  bank 
really  loans  to  a  buyer  of  goods.  The  liquidating  power 
with  respect  to  the  bank's  advance  is  furnished  by  a  future 
transaction  or  series  of  transactions,  and  not  by  the  past 


168    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

transaction.  Either  the  buyer  must  successfully  resell  the 
goods  in  question,  or  else  the  seller  must  successfully  com- 
plete the  operations  which  he  undertakes  with  the  funds  he 
receives  from  the  bank  when  he  in  effect  passes  the  receiv- 
ables on  to  it.  If  both  these  operations  fail,  the  security 
afforded  by  the  past  transaction  to  which  the  receivables 
in  question  specifically  relate,  falls  to  the  ground.  Further 
knowledge  is  required  than  is  afforded  by  the  mere  receiv- 
able. This  is  available  under  the  line-of -credit  system, 
Avith  the  analysis  which  it  undertakes  of  the  general  posi- 
tion of  the  applicant  for  credit. 

Finally,  the  line-of-credit  system  is  more  economical.  It 
represents  an  attempt  to  apply  the  economies  of  large  scale 
operation  to  credit  measurement  by  banks.^  Transactions 
are  grouped,  and  an  entire  series  is  passed  on  by  the  bank 
at  once,  instead  of  each  individually  or  a  few  together. 
Moreover,  the  unit  considered  is  the  individual  firm,  and 
the  whole  series  of  its  transactions,  both  purchases  and 
sales,  is  passed  upon  en  bloc.  The  bank  practically  con- 
siders the  totality  of  the  firm's  operations,  and  the  inter- 
play of  both  purchases  and  sales  upon  its  general  standing. 
While  the  bank  in  any  event  mediates  between  buyers  and 
sellers,  under  the  line-of-credit  system,  it  measures  the 
credit  by  .taking  its  position  firmly  within  a  given  stage 
of  the  economic  process,  instead  of  considering  specific 
goods  as  they  move  from  one  stage  to  another.  An  efficient 
and  more  economical  method  of  credit  measurement  is 
afforded.  The  losses  under  it  on  the  whole  are  not  sufficient 
to  require  that  it  be  generally  supplemented  by  the  specific 
transaction  method,  and  that  the  two-fold  system  called  for 
where  the  latter  is  used,  be  employed.  At  best,  the  two- 
fold system  may  be  desirable  in  the  case  of  poor  sellers, 
^providing  further  knowledge  of  tlieir  operations. 

'See  the  writer's  Some  Aspects  of  Banking  Theory   (New  York, 
1920),  Chap.  iv. 


NET-TERMS  SYSTEM— CREDIT  ASPECTS    169 

Several  attempts  have  been  made,  notably  in  the  Jenks 
Bill,  to  combine  the  specific  transaction  method,  making 
special  provision  for  accurate  certification  of  the  character 
of  the  merchandise,  with  measurement  by  the  buyer 's  local 
bank.  The  latter  then  measures  the  credit,  and  finances 
the  transaction.  In  other  words,  the  buyer  borrows  in 
order  to  take  the  cash  discount,  but  does  so  on  a  different 
form  of  paper.  By  thus  introducing;  the  local  bank  to 
measure  the  credit,  it  is  desired  to  obtain  a  better  check 
upon  the  buyer  through  the  additional  use  of  the  line-of- 
credit  system,  the  two  methods  of  credit  measurement  then 
supplementing  each  other.*  It  has  just  been  concluded  that 
this  combination  of  the  two  methods  is  unnecessary  as  a 
general  rule,  and  in  the  case  of  the  Jenks  Bill  the  conclu- 
sion would  be  re-enforced  by  the  complicated  nature  of  the 
instrument  itself. 

Collection  of  Accounts. — The  above  discussion  re- 
lates to  the  agencies  and  methods  whereby  credit  is 
measured.  It  is  a  totally  different  matter  when  the  collec- 
tion of  accounts  promptly  at  the  due  date  is  considered. 
Here  the  question  is:  what  form  shall  the  extension  of 
credit  represented  by  the  net  terms  take  ?  Shall  it  be  em- 
bodied, in  the  form  of  note  or  trade  acceptance,  or  shall 
it  be  unembodied,  in  the  form  of  the  open  account?  In 
discussing  this  problem,  w-e  waive  the  question  whether  or 
not  credit  instruments  used  for  this  purpose  represent  the 
best  paper,  and  consider  merely,  which  is  the  best  way  to 
get  accounts  paid  promptly  at  maturit3\  For  this  purpose, 
the  trade  acceptance  may  be  used  satisfactorily  in  con- 
junction with  the  cash  discount. 

It  is  often  stated  by  trade-acceptance  advocates  (and  the 
same  in  fact  would  be  true  of  the  note)  that  the  acceptance 

*  As  well  as  to  have  the  local  bank  judge  the  consumptive  powers 
of  the  community,  and  in  this  way  the  soundness  of  the  credit  granted 
the  retailer,  which  has  been  discussed  above. 


170    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

gives  the  seller  a  hold  on  the  buyer,  especially  when  the 
seller  passes  the  acceptance  through  a  bank,  either  by  dis- 
count or  by  turning  it  over  for  collection.  Accounts  are 
therefore  settled  more  promptly  where  it  is  used  than  where 
an  open  account  is  employed.  In  fact,  it  has  been  estimated 
that  90  per  cent  or  more  of  all  trade  acceptances  now  in 
use  are  employed  for  this  purpose.  The  further  advantage 
is  claimed  that,  as  this  method  results  in  prompter  collec- 
tions, credit  conditions  as  a  whole  are  thereby  improved. 

It  will  be  generally  agreed  that  it  is  desirable  to  use 
embodied  credit  for  certain  buyers,  in  place  of  the  open 
account.  But,  if  it  accomplishes  such  beneficial  results, 
might  it  not  be  well  to  go  one  step  further  and  use  it  for 
all  accounts  which  take  the  net  terms?  Trade-acceptance 
advocates  frequently  state  that  the  open  account  is  so  often 
abused  as  to  lead  it  to  break  down  under  its  own  weight. 
Mr.  R.  H.  Treman,  for  example,  has  indicted  the  system  in 
the  hardware  business  as  follows : ' 

Among  manufacturers  .  .  .  the  reports  show  that  when  the 
bills  are  discounted,  instead  of  being  paid  in  10  days,  they  have 
averaged  15  days,  and  for  those  who  take  the  option  of  the 
CO-day  credit  period,  the  average  payment  is  in  from  75  to  80 
days,  and  10  per  cent  or  more  of  eustomei's  take  90  days  or 
more. 

As  to  jobbers  (wholesale  distributors),  the  reports  show  that 
throughout  the  country  generally  from  40  to  50  per  cent  of  buyers 
discount  their  bills  within  15  days  after  purchase,  while  of 
those  Avho  take  the  60-day  option  from  25  to  30  per  cent  pay 
''promptly,"  or  within  one  month  followuig  the  60-day  maturity. 
Of  the  remaining  20  per  cent,  only  about  one-half  pay  in  the 
period  between  3  and  ,4  months  after  purchase  while  the  other 
half  pay  in  from  4  to  6  months,  or  never,  notwithstanding  that  the 
tenns  of  sale  agreed  upon  were  for  a  credit  of  only  60  days. 


"  Address  at  1916  Convention  of  the  National  Hardware  Associa- 
tion, reproduced  in  "Trade  Acceptances,  What  They  Are  and  How 
They  Are  Used,"  October  1,  1919,  pp.  23-24. 


NET^TERMS  SYSTEM— CREDIT  ASPECTS    171 

The  data  presented  in  Part  III,  however,  do  not  paint 
so  black  a  picture.  Moreover,  the  trade  acceptance  is  not 
an  unmixed  blessing.  It  is  more  cumbersome  to  handle 
than  the  open  account,  and  involves  considerable  labor. 
Farthermore,  it  is  a  mistake  to  believe  that  the  nature  of 
the  underlying  credit  can  be  greatly  improved  by  its  use. 
The  primary  factor  in  the  problem  is  the  individual  who 
receives  the  credit,  and  the  instrument  which  evidences  it 
is  only  secondary.  A  gi-eater  degree  of  discrimination 
would  therefore  seem  to  be  called  for.  In  fact,  under  the 
system  now  in  use,  an  attempt  is  made  to  distinguish  more 
carefully.  This  is  done  in  two  ways.  In  certain  lines, 
three  classes  of  buyers  are  noted:  (1)  those  who  discount 
their  bills;  (2)  those  who  buy  on  open  account;  and  (3) 
those  with  whom  a  note  or  trade  acceptance  is  used.  The 
poorer  buyers,  or  those  who  tend  to  run  past  due,  are 
required  to  use  embodied  credit,  while  the  remainder  who 
take  the  net  terms  use  the  open  account.  On  the  other 
hand,  buyers  in  general  are  notably  weak  in  certain  lines, 
and  all  buyers  taking  the  net  terms  in  these  lines  are  re- 
quired to  use  embodied  credit.  The  two  eases  just  sketched 
represent  a  more  careful  attempt  at  adjustment  to  the  needs 
of  the  present  situation  than  does  the  universal  use  of 
embodied  credit  for  those  who  take  the  net  terms,  and  one 
which  appears  better  adapted  to  modern  conditions. 

The  same  indictment  is  frequently  made  against  the  cash 
discount  as  against  the  open  account.  That  abuse  is  not 
flagrant  in  all  cases  is  sho\vn  by  the  following  statement  of 
Mr.  W.  M.  Bonham,  of  Knoxville,  Tennessee,  concerning 
the  situation  of  his  own  firm  in  the  wholesale  hardware 
industry :  ^ 

We  recently  kept  a  careful  tab  over  a  period  of  20  days  of 
those  who  discounted  after  the  terms  expired.    The  results  showed : 

• ' '  Terms  of  Sale  in  the  Hardware  Business, ' '  Bulletin  of  the  Na- 
tional Association  of  Credit  Men,  September,  1919,  p.  837. 


172    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

that  46  per  cent  of  the  payments  were  discounted;  the  amount 
discounted  was  57  per  cent  of  the  total  amount  received;  that 
90.2  per  cent  discounted  according  to  discount  terms.  And  among 
the  remaining  9.8  per  cent  there  were  veiy  few  cases  of  flagrant 
neglect  of  terms. 

The  relatively  limited  extent  to  which  such  abuse  exists 
does  not  appear  sufficient  to  offset  the  services  of  the  cash 
discount  indicated  earlier  in  the  chapter. 


CHAPTER  X 

THE  NET-TERMS  SYSTEM  VERSUS  THE  CASH-DISCOUNT  SYSTEM 
— SOCIAL  AND  BANKING  ASPECTS 

Effects  upon  Business  Practice. — Trade  acceptance  ad- 
vocates often  not  only  claim  advantages  for  their  instru- 
ment from  a  credit  point  of  view,  but  also  contend  that  its 
introduction  would  foster  sounder  business  practice  and 
improve  commercial  morality.  On  the  other  hand,  advo- 
cates of  the  cash-discount  system  not  only  deny  the  validity 
of  these  claims,  but  themselves  raise  certain  counter  claims. 
The  points  in  this  controversy  relate  specifically  to  em- 
bodied as  contrasted  with  unembodied  credit,  and  thus 
involve  the  question,  what  should  be  the  form  of  the  credit 
represented  by  the  net  terms? 

It  is  claimed  that  the  use  of  embodied  credit,  whether 
trade  acceptance  or  note,  makes  a  buyer  realize  his  obliga- 
tion to  a  greater  extent.  Hence  he  will  be  more  cautious 
about  incurring  indebtedness,  and  will  refrain  from  over- 
buying, at  the  same  time  that  he  avoids  over-extending 
credit  to  his  customers  and  is  careful  to  collect  more 
promptly  from  them.  As  a  result,  the  merchandising  sys- 
tem is  improved,  and  is  placed  upon  a  sounder  basis. 
These  points  are  applicable  primarily  to  the  weaker  buyer 
who  must  take  the  net  terms,  and  appear  more  or  less 
valid  in  such  cases.  On  the  other  hand,  howevei^,  it  is 
stated  that  credit  is  made  more  liberal  under  the  trade- 
acceptance  system,  as  will  be  seen  below,  and  the  seller  may 
also  feel  that  he  has  greater  security.  Due  to  these  two  fac- 
tors, he  may  put  forth  extra  sales  efforts  which  will  offset 

173 


174    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

the  feeling  of  caution  on  the  part  of  the  buyer.  Over  a 
period  of  time,  these  two  conflicting  tendencies  doubtless 
tend  to  reach  a  point  of  equilibrium,  and  little  clear  cut 
advantage  appears  on  either  side. 

It  is  further  claimed  that  the  use  of  embodied  credit 
serves  to  close  the  transaction  at  once.  The  thought  is  that 
the  note  or  trade  acceptance  gives  finality  and  definiteness. 
It  thus  serves  to  avoid  abuses  of  various  kinds,  such  as  re- 
turned goods,  and  to  improve  the  general  plane  of  com- 
mercial morality.     But  this  raises  two  points. 

1.  How  far  is  it  possible  or  even  desirable  to  do  this? 
It  is  of  course  desirable  to  have  the  conditions  surrounding 
the  transaction  clearly  understood  by  both  parties.  Finality 
is  possible  in  so  far  as  products  are  standardized,  but  with 
other  products  an  opportunity  must  be  given  for  such  ad- 
justment and  rectification  as  may  be  necessary.  The  seller 
should  not  be  given  leverage  with  respect  to  the  buyer,  but 
both  should  be  placed  on  an  even  keel.  Each  party  must 
have  sufficient  confidence  in  the  honesty  and  uprightness 
of  the  other  to  render  it  possible  to  leave  the  transaction 
open  in  the  manner  indicated.  Advance  in  commercial 
morality  lies  along  the  line  of  a  better  sense  of  square  deal- 
ing on  the  part  of  both,  rather  than  in  any  external  aids. 
"Whether  the  buyer  gives  a  note  or  trade  acceptance,  which 
may  be  altered  in  the  event  of  necessary  adjustment,  or 
leaves  the  amount  run  on  open  account,  would  appear  to 
be  of  importance  only  in  connection  with  those  buyers 
taking  the  net  terms  who  show  themselves  to  be  unscrupu- 
lous. 

2.  What  is  meant  by  closing  the  transaction  at  once, 
and  in  Vv'hat  manner  should  this  be  done  1  Advocates  of  the 
cash  discount  claim  that  it  serves  to  close  the  transaction 
at  once  for  as  many  accounts  as  possible.  It  furthermore 
does  this  and  gives  the  seller  cash  without  having  him  incur 
any  liability,  either  contingent  or  direct,  to  the  bank,  such 


SOCIAL  AND  BANKING  ASPECTS  175 

as  would  be  the  ease  if  he  himself  were  to  rediscount  paper 
with  it  or  to  borrow  from  it  while  he  held  the  receivables. 
This  of  course  gives  a  different  interpretation  to  ' '  closing  a 
transaction  at  once,"  stressing  as  the  objective  cash  pay- 
ment as  far  as  possible,  which  might  be  supplemented  by 
embodied  credit  on  the  accounts  taking  the  net  terms.  The 
fields  in  which  such  cash  payment  is  desirable  were  already 
considered  in  the  preceding  chapter,  and  the  two  points 
of  view  are  not  in  fundamental  conflict. 

Composition  of  the  Business  Community. — Leave  aside 
the  form  of  the  credit,  and  turn  to  the  question  whether 
or  not  a  cash  discount  should  be  granted.  This,  as  was 
seen  in  the  preceding  chapter,  is  a  totally  different  matter. 
The  indictment  is  often  made  of  the  cash  discount  system 
that  the  discount  discriminates  against  the  weak  buyer 
with  small  capital,  who  is  just  starting  in  business  and 
still  has  his  spurs  to  win.  Such  buyers  are  penalized  when 
they  take  the  net  terms,  for  the  goods  cost  them  more  than 
they  do  well-established  firms  who  are  able  to  pay  cash 
and  take  the  discount.  Were  the  cash  discount  abolished, 
and  net  terms  alone  quoted,  all  buyers  would  be  placed  on 
terms  of  equality,  and  the  individual  just  starting  in  busi- 
ness would  be  given  a  greater  chance  of  success.  This 
raises  many  and  varied  questions  of  economic  and  social 
policy.  What  form  of  economic  system  is  desired — one  in 
which  there  are  a  large  number  of  small  independent  busi- 
ness men,  even  if  society  as  a  whole  may  have  to  pay  a 
higher  price  because  of  their  inefficiency  when  they  start 
in  business,  or  one  in  which  the  business  unit  is  allowed  to 
develop  to  its  point  of  maximum  efficiency,  and  no  effort  is 
made  to  aid  the  small  business  man?  When  the  acid  test 
of  actual  experience  is  applied,  the  latter  does  not  seem 
to  have  been  very  seriously  handicapped  in  the  United 
States,  in  spite  of  the  prevalence  of  the  cash-discount  sys- 
tem for  a  number  of  decades. 


176     THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Relation  of  the  Borrower  to  the  Bank. — The  effects 
which  the  system  of  commercial  credit  has  upon  prices,  and 
the  relation  of  the  system  to  banking,  are  really  two  sep- 
arate problems.  In  considering  the  latter  question,  how- 
ever, possible  effects  which  different  banking  methods  might 
have  upon  prices  must  be  taken  into  account.  It  will 
therefore  be  well  to  introduce  the  question  of  prices  at  the 
appropriate  point  in  the  discussion  of  banking,  and  to 
plunge  directly  into  banking  now,  instead  of  considering 
each  question  separately. 

Neither  the  net-terms  system  nor  the  cash-discount  sys- 
tem necessarily  implies  a  specific  method  of  borrowing  from 
the  bank.  In  either  case,  borrowing  may  be  upon  a  promis- 
sory note,  either  straight  or  endorsed,  or  upon  the  receiv- 
ables (to  the  extent  that  these  exist  in  embodied  form), 
either  by  rediscounting  or  by  using  them  as  collateral.  It 
is  generally  held,  however,  that  the  use  of  the  trade  accept- 
ance creates  a  special  incentive  to  borrow  at  the  bank  by 
means  of  it.  This  is  implied  in  the  statement  of  trade- 
acceptance  advocates  that  it  substitutes  "live"  for  "dead" 
capital.  This  has  served  to  call  attention  to  the  question 
of  borrowing  from  banks  in  several  different  forms,  and 
the  dangers  which  may  attend  such  a  practice  when  several 
banks,  and  perhaps  the  open  market  in  addition,  are  em- 
ployed by  an  individual  firm.  This  is  perfectly  true  with 
respect  to  the  poorer  credit  risks,  and  serves  to  call  atten- 
tion to  the  need  for  careful  scrutiny  of  credit  in  such  eases. 
It  is  not  an  argument  against  the  same  individual  borrow- 
ing in  several  forms. 

Furthermore,  the  question  has  been  raised,  what  effect 
has  rediscounting  upon  the  seller's  statement,  and  upon  the 
line  of  credit  which  he  receives  from  his  bank?  It  has 
been  said  that  the  bank  will  loan  dollar  for  dollar  on  trade 
acceptances,  and  by  thus  taking  them  at  full  value,  will 
increase  the  borrowing  capacity  on  these  accounts,  inas- 


SOCIAL  AND  BANKING  ASPECTS  177 

much  as  they  are  not  then  figured  in  the  2  to  1  current 
ratio  considered  in  determining  the  line  of  credit.  This 
has  been  criticized  by  Mr.  Bonham  in  the  article  cited 
above,  as  follows : 

If  the  bank  is  lending  dollar  for  dollar  on  accounts  receivable, 
as  represented  by  trade  acceptances,  what  would  be  the  ratio  for 
loans  on  his  other  quick  assets,  including  merchandise  stocks  and 
past-due  trade  acceptances? 

To  this  might  be  added  the  fact  that  the  borrower  has 
also  assumed  a  contingent  liability  in  rediscounting  the 
acceptances.  On  the  other  hand,  the  funds  received  from 
the  bank  would  appear  in  the  borrower's  statement,  first  as 
cash  and  then  probably  as  merchandise,  and  would  thus 
result  merely  in  changing  one  class  of  quick  assets,  namely 
receivables,  into  another  class.  No  additional  direct  lia- 
bility would  be  incurred,  and  a  contingent  liability  would 
merely  be  assumed.  The  latter  would  be  the  only  way  in 
which  the  credit  standing  of  the  borrower  was  weakened, 
and  through  which  his  line  of  credit  should  be  affected. 

Automatic  Elasticity  of  Volume  of  Comjnercial  Paper. 
— The  thought  is  often  expressed  by  advocates  of  the  trade 
acceptance  that  the  instrument  will  be  automatically  elas- 
tic, so  to  speak.  Inasmuch  as  it  is  created  as  the  result  of 
a  specific  transaction,  it  will  fluctuate  in  volume  in  response 
to  the  needs  of  business.  To  the  extent  that  these  accept- 
ances are  rediscounted  with  the  bank,  the  amount  of  bank 
advances  will  also  be  automatically  adjusted  in  this  way. 
This  in  fact  is  true  of  receivables  existing  in  the  form  of 
notes  as  well  as  of  acceptances.  The  only  advantage  of 
the  trade  acceptance  lies  in  the  fact  that  it  provides  a 
distinctive  form  of  paper  to  represent  the  extension  of 
credit  in  this  special  manner,  while  the  note  may  represent 
extension  of  credit  for  any  one  of  a  variety  of  purposes. 

Automatic  elasticity  of  commercial  paper  concerns  the 


178  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

banking  system  as  a  whole.  As  such,  it  is  entirely  distinct 
from  the  question  which  was  discussed  in  the  previous 
chapter,  namely,  the  specific  transaction  as  a  basis  for 
credit  measurement.  The  thought  is  that  in  this  manner 
the  banking  system  will  be  able  to  operate  safely.  The  pro- 
ceeds of  the  promissory  note  may  be  used  for  speculation 
or  for  fixed  investment,  but  the  trade  acceptance  carries 
on  its  face  evidence  of  the  use  which  the  buyer  (who  really 
receives  the  loan)  is  making  of  the  funds.  Moreover,  there 
will  be  correspondence  between  the  volume  of  bank  credit 
and  the  volume  of  commodities  exchanged,  as  evidenced  by 
the  volume  of  transactions  shown  in  the  receivables  which 
are  discounted.  Commercial  paper  of  this  description  pro- 
vides a  superior  basis  for  the  issue  of  hand  to  hand  cur- 
rency, the  volume  of  which  then  also  fluctuates  in  response 
to  the  needs  of  trade.  Inflation  is  accordingly  impossible, 
for  bank  credit  based  in  this  way  upon  commercial  paper 
and  fluctuating  in  amount  with  commercial  and  industrial 
requirements,  cannot  influence  general  prices.  A  great  evil 
is  therefore  avoided. 

But  this  view  has  certain  outstanding  defects.  Too  much 
reliance  is  placed  upon  mere  form,  and  not  enough  upon 
actual  substance.  While  the  amount  of  paper  should  be 
the  same  as  the  volume  of  transactions,  there  is  no  guaranty 
that  the  maturities  will  be  adjusted  to  the  actual  length  of 
time  required  by  the  buyer  in  each  transaction.  In  fact, 
it  was  seen  in  Chapter  VIII  that  during  the  war  specu- 
lators in  the  textile  lines  bought  and  sold  goods  on  terms 
calling  for  a  trade  acceptance,  the  maturity  of  which  far 
exceeded  the  time  required  for  their  turnover.  As  a  result, 
in  some  cases  several  pieces  of  paper  came  to  be  outstanding 
against  the  same  merchandise.  Obviously,  inflation  can  be 
brought  about  in  this  manner,  as  well  as  by  lack  of  corre- 
spondence with  the  volume  of  transactions.  Abuse  of  the 
trade  acceptance  in  this  way  leads  to  disappointment  on 


SOCIAL  AND  BANKING  ASPECTS  179 

the  part  of  those  who  have  paid  attention  to  the  claims 
made  for  the  instrument,  and  who  have  come  to  expect 
that  it  shall  operate  automatically,  instead  of  recognizing 
that  the  use  made  of  any  tool  depends  in  last  analysis  upon 
the  operator,  and  that  he  guides  its  destinies. 

Effects  upon  General  Prices. — The  facts  just  mentioned 
from  Chapter  VIII  indicate  that  in  actual  practice  the 
trade  acceptance  may  serve  to  make  credit  easier.  In  fact, 
trade-acceptance  advocates  often  point  to  a  result  of  this 
kind  as  one  of  the  desirable  accomplishments  of  the  system 
they  propose.  They  believe  that  this  will  follow  because 
of  the  greater  degree  of  safety  achieved  in  the  general 
banking  and  financial  situation.  The  trade  acceptances  and 
other  receivables  discounted  will  not  be  considered  as  part 
of  the  borrower 's  regular  line  of  credit,  but  will  constitute 
an  addition  to  that  line.  Leaving  aside  the  fact  that  the 
claim  of  easier  credit  because  of  greater  safety  has  been 
answered  in  the  negative  in  the  previous  discussion,  the 
effect  of  easier  credit  would  be  an  increase  in  prices.  But 
Professor  H.  G.  Moulton  of  the  University  of  Chicago  has 
pointed  out  that,  assuming  that  general  prices  or  the  price 
level  varies  inversely  as  the  quantity  of  currency,  both 
money  and  bank  checks,  the  increase  in  prices  would  tend 
to  be  general,  and  would  serve  merely  to  raise  the  price 
level  as  a  whole.  While  this  would  be  true  on  the  average, 
different  goods  would  be  affected  unequally,  and  dispro- 
portion as  between  the  prices  of  different  classes  would 
result. 

Prices  of  Particular  Goods. — This  attempt  to  trace  the 
effect  upon  prices  of  the  trade-acceptance  or  net-terms 
system  proceeds  from  what  may  be  termed  the  currency 
side.  Attempt  has  also  been  made  to  approach  the  question 
from  the  point  of  view  of  the  cost  of  individual  articles. 
This  connection  has  been  traced  in  several  waj'S.  It  is  said 
that  risks  are  reduced  and  credit  losses  are  less,  so  that 


180    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

prices  will  be  figured  closer,  and  therefore  will  be  lower. 
Inasmuch  as  the  point  would  be  more  or  less  valid  for  all 
commodities,  the  prices  of  commodities  in  general  would 
decrease.  Again,  it  is  claimed  that  safer  banking  methods 
would  serve  to  reduce  the  rate  of  interest,  and  this  in  turn, 
as  an  element  in  the  cost  of  goods,  would  tend  to  reduce 
prices,  although  but  slightly.  On  the  other  hand,  those 
who  uphold  the  cash-discount  system  point  to  the  great 
tendency  to  decrease  in  both  profits  and  prices  in  the 
United  States  during  the  past  20  years.  They  also  claim 
that  the  use  of  their  system  enables  the  merchant  to  turn 
his  capital  over  more  rapidly,  but  this  of  course  would  be 
accomplished  as  well  through  the  immediate  rediscount  by 
him  of  receivables  with  the  bank. 

Finally,  the  relation  of  the  cash  discount  to  the  selling 
price  of  goods  has  been  considered.  Opponents  of  the 
cash  discount  claim  that  it  is  merely  added  to  what  is  a 
basic  price  for  the  merchandise,  and  that  it  thus  serves  to 
raise  the  average  price  paid  for  the  goods.  Advocates,  on 
the  other  hand,  claim  that  in  last  analysis  prices  are  fixed 
by  general  competitive  conditions,  and  that  it  is  impossible 
for  a  seller  arbitrarily  to  add  this  amount  when  figuring 
the  price  of  his  goods.  Theoretically,  as  was  seen  in  Chap- 
ter V,  the  basic  price  should  be  somewhere  between  the 
cash  discount  price  (as  it  may  be  termed)  and  the  net  price, 
the  range  between  the  two  being  determined  by  the  current 
rate  of  interest,  the  cost  of  credit  work  and  the  bad  debt 
loss.  Under  ideal  competitive  conditions,  the  actual  price 
realized  would  tend  toward  this  basic  price,  although  at 
any  one  moment  more  or  less  discrepancy  would  naturally 
be  found.  In  any  event,  however,  the  discount  would  not 
appear  to  be  a  serious  factor  in  increasing  the  prices  of 
goods.  It  merely  tends  to  result  in  making  the  merchandise 
somewhat  cheaper  to  the  best  accounts  and  somewhat  dearer 
to  the  poorer  accounts  than  under  a  net  terms  system. 


SOCIAL  AND  BANKING  ASPECTS  181 

All  in  all,  no  clear  cut  effects  upon  prices  necessarily 
appear  to  result  from  either  the  cash-discount  system  or 
the  net-terms  system.  If  credit  were  easier  under  the 
latter,  the  general  price  level  would  be  higher,  but  in  view 
of  the  analysis  which  has  been  made,  it  appears  extremely 
doubtful  whether  credit  would  be  easier  in  the  long  run. 
Similarly,  neither  system  appears  to  exert  special  influence 
to  either  increase  or  decrease  the  prices  of  individual  com- 
modities. The  trade-acceptance  system  does  not  seem,  on 
the  whole,  to  result  in  greater  safety,  hence  the  arguments 
for  a  tendency  to  lowered  prices  based  upon  that  premise 
fall  to  the  ground.  On  the  other  hand,  the  cash  discount 
does  not  seem  to  be  a  potent  factor  tending  to  increase  the 
price  of  goods.  In  short,  the  two  systems  of  credit  appear 
to  be  neutral  in  so  far  as  influence  on  prices  is  concerned. 

The  Discount  Market. — One  question  still  remains :  with 
which  type  of  paper  can  the  banking  system  operate  most 
satisfactorily?  Shall  the  basic  type  be  single-name  paper, 
or  double-name  paper  of  one  description  or  another  ?  Par- 
ticularly is  this  question  important  in  connection  with  that 
paper  which  circulates,  so  to  speak,  in  the  open  discount 
market.  Open-market  paper  must  possess  the  highest  de- 
gree of  both  safety  and  liquidity.  It  is  in  this  connection 
that  particular  stress  has  been  placed  upon  the  fact  that 
the  trade  acceptance  bears  two  names.  It  is  claimed  that 
this  results  in  paper  much  stronger  than  that  bearing 
merely  a  single  name,  such  as  is  found  where  a  straight 
promissory  note  is  used.  But  is  the  double-name  feature 
actually  of  as  great  importance  as  is  often  claimed?  The 
idea  dates  back  to  the  classical  writers  on  banking,  who 
wrote,  as  Professor  E.  E.  Agger  has  pointed  out,  in  an  era 
of  free  competition  and  small  independent  business.  It 
assumed  that  both  maker  and  acceptor  were  practically  on 
the  same  credit  level,  so  that  the  presence  of  the  second 
name  tended  to  double  the  security.    But  this  is  manifestly 


182    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

not  true  of  modern  conditions.  One  party  to  a  transaction 
frequently  overshadows  the  other,  and  the  second  name 
adds  strength  only  where  it  is  better  than  the  first.  The 
stronger  name  governs  the  credit  judgment  passed  upon 
the  paper. 

Moreover,  is  a  trade  acceptance,  or  in  fact  any  form  of 
obligation  of  a  business  house,  satisfactory  from  the  point 
of  view  of  the  open  market?  Can  judgment  be  quickly 
reached  upon  the  paper  of  thousands  of  names,  comprising 
the  entire  business  community?  This  does  not  raise  the 
question  whether  or  not  a  seller  can  satisfactorily  extend 
credit,  but  considers  whether  absolutely  safe  and  stand- 
ardized paper,  which  shall  be  the  best  in  existence,  can  be 
obtained  in  this  manner.  It  is  obvious  that  there  is  both 
too  large  an  element  of  risk,  and  too  great  difficulty  in 
arriving  at  a  judgment  as  to  the  paper.  For  this  purpose 
the  guaranty  of  a  weU-known  and  responsible  credit 
specialist  is  required.  This  may  take  the  form  either  of  a 
direct  obligation  of  the  specialist,  such  as  the  banker's 
acceptance,  or  of  endorsement  by  him  of  the  obligation  of 
a  business  house.  Furthermore,  the  ranks  of  the  credit 
specialists  may  be  by  no  means  so  broad  as  to  include  the 
entire  banking  community,  but  may  comprise  merely  a 
select  few  instead.  Where  attempt  is  made  to  extend  the 
ranks  of  the  credit  specialists  too  greatly,  distinction  comes 
to  be  made  between  them,  and  they  are  grouped  into  several 
classes  of  different  degrees  of  standing.  In  the  manner 
indicated,  the  paper  appearing  in  the  open  market  is 
standardized  to  the  requisite  degree,  and  enabled  to  circu- 
late as  far  as  may  be  necessary. 

Conclusions. — In  considering  commercial-credit  methods 
and  the  commercial-credit  system,  it  is  necessary  to 
analyze  carefully  the  several  distinct  conditions  which  are 
found,  and  the  peculiar  methods,  forms  of  instruments, 
etc.,  which  these  call  for.    Analysis  of  this  kind  reveals  the 


SOCIAL  AND  BANKING  ASPECTS  183 

fact  that  the  cash-discount  system  is  specially  adapted  to 
certain  conditions,  and  serves  a  useful  purpose  in  connec- 
tion with  them,  while  the  net-terms  system  is  peculiarly 
applicable  under  other  conditions.  Furthermore,  when  a 
survey  is  made  of  trade-acceptance  development  in  the 
United  States,  a  distinct  tendency  is  found  away  from  gen- 
eral and  indiscriminate  use  of  the  instrument  and  toward 
careful  consideration  of  its  specific  fields  of  use  and  the 
adaptation  of  it  to  these  fields.  An  experimental  process 
is  going  on,  which  recognizes  that  it  is  specially  adapted  to 
certain  conditions,  and  endeavors  to  seek  out  these  fields- 
Experience  has  demonstrated  that  its  field  of  use  is  some- 
what different  than  had  previously  been  stressed,  and  that 
it  is  of  particular  service  in  connection  with  the  collection 
of  accounts.  Accordingly,  instead  of  being  in  conflict  with 
the  present  system  of  commercial  credit  in  the  United 
States,  when  properly  analyzed,  it  fits  into  and  becomes 
an  integral  part  of  that  system. 

The  campaign  so  earnestly  waged  by  trade-acceptance 
advocates  has  served  to  call  attention  to  commercial-credit 
problems,  and  to  bring  about  careful  analysis  of  them  from 
every  angle.  A  better  understanding  of  them  has  been 
afforded.  Not  only  have  the  technical  aspects  been  thor- 
oughly considered,  but  their  relation  to  banking  and  the 
banking  system  is  now  better  understood.  It  is  realized 
also  that  these  problems  cannot  be  considered  in  isolation, 
but  that  effort  must  be  made  to  trace  their  broader  rela- 
tion to  and  effect  upon  the  entire  economic  system.  If  the 
trade  acceptance  movement  had  served  no  other  purpose 
than  merely  to  focus  attention  upon  these  questions,  it 
would  still  have  rendered  worthy  service  to  the  cause  of 
better  American  business  practice. 

A  final  lesson  that  this  study  of  trade  acceptance  prin- 
ciples teaches  is  that  the  fundamental  factor  in  credit 
granting  is  the  recipient  of  credit,  and  not  the  form  in 


184    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

■which  the  credit  is  extended  or  the  agency  by  which  it  is 
measured.  The  buyer  of  goods  and  his  standing  in  last 
analysis  is  the  final  touchstone,  and  no  means  exists  by 
which  a  second-rate  credit  risk  can  be  magically  trans- 
formed into  a  first-rate  one.  All  external  aids  or  devices, 
such  as  the  use  of  embodied  instead  of  unembodied  credit, 
while  they  have  their  place,  are  merely  auxiliary  and  do 
not  radically  alter  the  fundamental  feature — the  underly- 
ing credit  risk.  Too  great  reliance  cannot  be  placed  upon 
them,  nor  are  they  automatic  or  mechanical  in  their  opera- 
tion. 


PART  III 
TERMS  NOW  IN  USE 


CHAPTER  XI 

THE  FOODSTUFFS  INDUSTRIES 

Part  III  will  deal  with  the  actual  terms  which  are  in 
use  in  leading  industries.  Each  chapter  will  treat  a  group 
of  more  or  less  related  lines.  The  terms  situation  in  each 
will  be  described,  and  will  be  prefaced  with  such  data  as 
to  marketing  and  business  conditions  in  the  industry  as 
seem  pertinent.  Although  specific  reference  will  only  be 
made  in  certain  outstanding  cases  to  the  factors  discussed 
in  Part  I,  their  application  will  readily  be  perceived 
throughout  the  discussion. 

The  present  chapter  deals  with  the  foodstuffs  industries.^ 
This  includes  a  group  of  products,  certain  of  which  are 
articles  of  food  in  the  strict  sense  of  the  term,  such  as 
meats,  flour  and  canned  goods,  and  certain  of  which 
are  more  in  the  nature  of  luxury  items,  such  as  con- 
fectionery and  tobacco.  In  all  of  them  a  part,  and  in 
most  the  bulk,  of  the  product  passes  from  the  hands 
of  the  manufacturer  through  those  of  the  wholesale  grocer. 
Accordingly  his  terms  will  be  discussed  after  those  of 
the  manufacturers  in  the  several  lines  from  whom  he  pur- 
chases. 

Except  for  the  general  nature  of  the  article,  conditions 
in  this  group  of  industries  are  not  similar.  Extremely 
perishable  goods  tend  to  be  sold  directly  by  the  manufac- 
turer to  the  retailer,  while  a  considerable  proportion  of 

^  Acknowledgment  is  due  Mr.  Sylvan  L.  Stix,  of  Seeman  Bros., 
Inc.,  New  York,  and  Mr.  B.  D.  Crane,  Secretary,  Reynolds-Davia 
Grocery  Co.,  Inc.,  Fort  Smith,  Ark.,  for  reading  this  chapter. 

187 


188    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

other  more  durable  goods  passes  through  the  wholesaler's 
hands.  The  former  are  on  almost  a  cash  basis,  while  the 
task  of  carrying  the  latter  is  often  shifted  to  the  buyer. 
Carload  or  large  sized  shipments  of  articles  such  as  meats, 
flour  and  canned  fruits  and  vegetables,  usually  carry  sight- 
or  arrival-draft  terms.  These  terms  naturally  occur  chiefly 
on  sales  to  wholesalers  or  large  consumers,  and  sales  to 
retailers  in  many  cases  call  for  longer  time.  On  the  whole, 
however,  open  account  terms  generally  do  not  run  over 
30  days,  except  for  articles  such  as  non-advertised  brands  of 
cigars  and  teas.  Cash  discounts  are  correspondingly  small, 
and  in  many  cases  are  not  quoted. 

Meat  Packing.- — The  various  classes  of  meats  are  largely 
sold  direct  by  packers  to  retail  dealers.  It  is  estimated 
that  at  the  present  time  about  90  per  cent  of  the  fresh 
meat  marketed  in  the  United  States  is  sold  either  by  branch 
houses  of  the  packers  or  by  packer  representatives.  Cured 
meats,  however,  are  sold  to  wholesale  grocers  (who  in  turn 
sell  to  retailers)  in  some  country  districts  where  the 
volume  of  business  is  small.  The  same  is  true  of  canned 
meats,  but  it  is  estimated  that  80  per  cent  of  the  business 
in  them  is  nevertheless  direct.  Wholesale  grocers  in  the 
southern  states,  located  at  points  not  accessible  to  packer 
house  branches,  buy  assorted  carloads  of  dry  salt  meats, 
canned  meats  and  lard.  The  small  percentage  of  whole- 
salers in  the  country  as  a  whole  is  usually  located  at  other 
than  packing  centers,  and  the  general  character  of  their 
business  is  very  similar  to  that  done  by  the  branch  houses 
of  the  larger  packers.  Those  dealers  who  are  located  in 
the  larger  northern  cities  usually  handle  principally  fresh 
meats,  smoked  meats  and  lard. 

Fresh  meats  are  generally  sold  on  a  weekly  basis,  and 
in  some  cases  collection  for  all  deliveries  during  a  given 

'  Acknowledgment  is  due  Mr.  Frank  D.  Rock,  Credit  Manager, 
Armour  and  Co.,  for  reading  this  section. 


THE  FOODSTUFFS  INDUSTRIES  189 

week  is  made  by  a  specified  day  of  the  following  week. 
Deviations  from  the  regular  terms,  such  as  the  use  of  terms 
of  from  10  days  to  30  days,  are  principally  the  result  of 
competitive  conditions.  Cured  meats,  however,  are  sold 
to  a  considerable  extent  on  longer  time,  usually  30  days. 
Dry  salt,  dry  smoked  and  sweet  pickled  meats  are  almost 
universally  sold  on  strictly  net  terms,  whereas  sugar-cured 
meats,  that  is,  hams  and  bacon,  are  subject  in  some  cases 
to  a  cash  discount  of  %  per  cent  for  payment  within  10 
days,  although  in  practice  buyers  seldom  take  advantage 
of  the  discount.  These  terms  also  obtain  for  lard,  as  well 
as  for  canned  meats,  although  some  packers  grant  a  higher 
discount,  such  as  1  per  cent,  on  the  latter.  Some  dealers 
who  buy  both  perishable  products  and  provisions  try  to 
withhold  remittances  on  all  products  for  30  days,  or  to 
settle  on  a  monthly  basis.  Packers  endeavor  to  obtain 
either  prompt  weekly  or  semi-monthly  settlement,  for 
example,  by  the  20th  on  all  invoices  dated  from  the  1st  to 
the  15th. 

In  addition  to  this  distinction  according  to  the  nature 
of  the  product,  others  are  made  according  to  the  type  of 
purchaser.  Carload  shipments  are  almost  universally  made 
against  sight  draft,  bill  of  lading  attached.  Proximo  terms, 
ranging  from  the  10th  to  the  25th,  are  at  times  employed 
in  the  case  of  sales  (1)  to  municipal,  state  and  govern- 
ment institutions;  (2)  to  railroad,  lumber  and  coal  com- 
panies and  cotton  factors;  and  (3)  to  large  general  stores 
and  wholesale  grocers.  The  third  group  is  easiest  to  con- 
trol and  most  amenable  to  pressure  on  collections,  the  sec- 
ond less  so,  and  the  first  least.  Complaint  is  made  that,  in 
certain  cases,  payment  is  not  effected  for  2  or  3  months 
or  longer.  Terms  to  the  retailer  are  also  adjusted  to  local 
conditions,  and  "pay-day"  terms  are  found  in  certain 
places,  such  as  railroad,  steel  mill  and  mining  towns,  where 
the  retailer  carries  the  worker  from  one  pay  day  to  the  next, 


190    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

and  where  the  due  dates  of  his  bills  are  adjusted  to  the 
pay  days,  frequently  being  semi-monthly. 

Jobbers  in  the  larger  centers  sometimes  extend  longer 
terms  to  retailers.  They  not  infrequently  grant  2  per  cent 
10  days,  net  60  days,  as  compared  with  maximum  terms 
extended  by  packers  of  %  to  1  per  cent  10  days,  net  30 
days,  and  they  often  also  employ  proximo  terms.  How- 
ever, there  is  stated  to  be  a  tendency  towards  shorter 
terms. 

Oanning. — Canned  products  may  most  conveniently  be 
divided  into  fruits  and  vegetables,  soups,  milk  and  fish. 
Most  canners  are  very  small  in  size,  confine  themselves  to 
one  or  two  products,  and  are  located  near  the  source  of 
the  raw  materials  to  be  canned.  A  small  number  pack 
a  general  line  of  fruits  and  vegetables,  while  there  are  a 
few  very  large  packers  who  pack  or  handle  practically 
every  class  of  canned  goods.  Sales  are  made  largely  to 
wholesale  grocers. 

In  1911,  committees  representing  the  National  Canners 
Association  and  the  National  Wholesale  Grocers  Associa- 
tion discussed  the  question  of  a  uniform  contract  to  apply 
to  sales  of  canned  fruits  and  vegetables  by  packers.  The 
grocers  submitted  a  contract  calling  for  2  per  cent  dis- 
count for  sight  draft  with  bill  of  lading  attached,  payable 
on  arrival  and  prompt  examination.  This  was  acceptable 
to  the  canners,  who  agreed  to  favor  its  adoption  at  the 
meeting  of  the  executive  committee  and  at  the  annual  con- 
vention. There  have  been  a  number  of  conferences  since 
then,  but  no  absolute  uniformity  of  terms  has  prevailed  in 
consequence.  State  associations  of  canners  in  several  cases, 
such  as  Wisconsin  and  California,  have  recommended  eon- 
tracts  for  use  by  members.  A  study  made  several  years 
ago  states  that  the  question  of  rates  of  discount  has  fre- 
quently been  discussed  at  the  conventions  of  such  as- 
sociations, and  that  many  canners  have  favored  a  lower 


THE  FOODSTUFFS  INDUSTRIES  191 

rate    while    many    have    also    advocated    shorter    credit 
periods.^ 

The  older  terms  which  prevailed  for  many  years  in  the 
canning  industry  were  11/2  per  cent  10  days,  net  60  days, 
except  on  the  Pacific  Coast,  where  the  net  terms  were 
largely  30  days.  During  the  past  decade,  however,  whole- 
sale grocers  have  often  urged  packers  to  increase  the  dis- 
count. In  consequence,  a  considerable  number  of  packers 
began  to  allow  a  cash  discount  of  2  per  cent  in  cases  where 
a  sight  draft  with  bill  of  lading  attached  was  used.  The 
latter  terms  are  frequently  found  in  New  York,  Ohio  and 
the  middle  western  states  included  in  Federal  Reserve  dis- 
trict No.  7,  although  in  some  instances  the  2  per  cent  dis- 
count is  allowed  instead  when  payment  is  made  on  arrival 
of  the  shipment.  As  a  result  of  this  change  in  terms,  three 
optional  dates  of  payment  are  now  granted  by  some 
packers:  2  per  cent  for  payment  of  sight  draft;  11/2  per 
cent  for  payment  on  arrival  or  -within  3  days  after  arrival, 
or  within  10  days  from  date  of  invoice ;  and  the  usual  net 
terms. 

Besides  the  increase  in  the  discount,  the  only  other  gen- 
eral change  in  terms  has  been  the  shortening  of  the  net 
period  in  many  sections  from  60  days  to  30  days.  Only 
in  some  localities,  such  as  Maine  and  Colorado,  have  the 
former  terms  continued  in  use.  In  some  sections  a  draft 
is  used  where  a  cash  discount  of  II/2  per  cent  10  days  is 
quoted,  but  certain  packers  use  the  draft  only  where  buyers 
are  unreliable.  In  some  cases,  discount  terms  only  are 
quoted,  and  no  net  terms  are  specified. 

Each  of  the  other  principal  classes  of  products  has  cer- 
tain regular  terms.  Canned  soups  are  sold  on  terms  of 
11/2  per  cent  or  2  per  cent  10  days,  net  30  days.     Several 

*  Report  of  the  Federal  Trade  Commission  on  Canned  Goods;  Gen- 
eral Beport  on  Canned  Vegetables  and  Fruits,  May  15,  1918,  pp. 
S2-83. 


192   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

years  ago  one  of  the  leading  manufacturers  increased  the 
discount  from  li^  per  cent,  and  some  manufacturers  in- 
creased it  in  1917,  from  1  per  cent,  in  response  to  constant 
requests  from  organizations  representing  the  purchasers. 
Some  Pacific  Coast  customers  receive  the  discount  for 
remittance  within  3  days  after  arrival  of  the  goods.  Pre- 
serves, ketchup,  sauces,  pork  and  beans,  etc.,  are  generally 
sold  upon  terms  of  1^4  per  cent  10  days,  net  30  days, 
although  discounts  of  1  per  cent  and  2  per  cent  are  also 
used.  An  exception  to  these  terms  is  found  in  the  case 
of  a  leading  manufacturer  of  these  products,  who  elim- 
inated his  cash  discount  about  1917,  and  now  sells  only  on 
terms  of  net  30  days. 

Terms  on  condensed  and  evaporated  milk  are  generally 

2  per  cent  10  days,  net  30  days.  Prior  to  April,  1911,  the 
discount  was  largely  1  per  cent,  the  change  being  due  in 
considerable  measure  to  the  efforts  of  the  wholesale  gi'ocers. 

Terms  on  canned  fish,  especially  salmon,  are  usually  1^2 
per  cent  10  days,  net  30  days.  Southern  California  packers 
of  tuna  and  sardines  have  the  same  terms,  except  that  they 
use  a  sight  draft  with  documents  attached,  payable  within 
15  days  from  date  and  provide  that  if  the  shipment  arrives 
prior  to  the  maturity  date,  payment  shall  be  made  within 

3  business  days  after  arrival.*  Terms  on  Maine  sardines 
are  1%  per  cent  10  days,  net  60  days,  while  some  minced 
razor  clam  packers  on  the  north  Pacific  Coast  grant  a  2 
per  cent  discount,  although  most  allow  only  li/4  per  cent. 
It  will  be  seen  that  the  terms  on  canned  fish  are  thus  sub- 
stantially similar  to  those  prevailing  for  the  other  canned 
products  in  each  locality. 

Flour  Milling.^ — Many  of  the  large  flour  mills  maintain 

*  These  terms  are  similar  in  large  measure  to  those  previously 
adopted  by  the  Canners'  League  of  California,  and  in  effect  prior 
to  March,  1918. 

'  Acknowledgment  is  due  Mr.  J,  H.  Mulliken,  of  Washburn-Crosby 
Co.,  for  reading  this  section. 


THE  FOODSTUFFS  INDUSTRIES  193 

branch  offices  in  the  important  distributing  centers  to 
market  their  output  to  the  retail  grocery  and  baking  trade. 
Several  of  the  larger  mills  sell  30  per  cent  of  their  output 
in  this  way,  the  remainder  going  to  jobbers  and  whole- 
sale grocers.  On  the  other  hand,  the  milling  process  is 
simple,  and  the  cost  of  milling  equipment,  on  the  whole,  is 
comparatively  small.  Many  small  mills  therefore  have  been 
constructed  and  are  operated  throughout  the  country,  and, 
except  in  New  England  and  a  few  Southern  States,  still 
supply  a  considerable  part  of  the  local  demand. 

There  are  two  corresponding  types  of  terms,  according 
to  whether  carload  shipments  are  made  or  whether  the 
flour  is  sold  locally.  Carload  shipments  are  usually  made 
against  arrival  draft,  with  order  bill  of  lading  attached, 
although  sight  draft  is  also  used.  In  some  cases,  an  arrival 
draft  has  been  used  for  shipments  to  distant,  and  a  sight 
draft  for  shipments  to  nearer,  territory.  Little  use  is 
made  of  time  drafts,  although  these  were  sometimes  used 
in  the  past  in  combination  with  a  sight  or  arrival  draft,  so 
that,  for  example,  the  terms  might  call  for  payment  of  ^2 
the  amount  through  arrival  draft  and  the  remainder 
through  a  30-day  draft. 

There  has  usually  been  a  price  differential,  generally 
amounting  to  5  cents  per  barrel,  but  sometimes  10  cents, 
for  payment  by  sight  draft  instead  of  arrival  draft.  Often, 
however,  the  use  of  such  a  differential  depends  upon  the 
distance  for  which  shipment  is  made.  One  authority  has 
stated  that  it  is  customary  only  for  millers  located  west 
of  the  Mississippi  River  where  cars  are  long  in  transit. 
A  higher  differential  is  employed  in  certain  cases  where 
a  30-day  draft  is  used.  In  case  of  sales  to  state  institu- 
tions and  large  corporations  where  remittance  is  made  from 
the  main  office,  as  well  as  sales  to  firms  located  in  places 
where  there  are  no  local  banking  facilities,  the  use  of  a 
draft  is  dispensed  with  and  remittance  upon  arrival  is 


194   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

specified  instead.  In  view  of  recent  good  transportation 
conditions,  it  is  believed,  however,  that  few  mills  now  make 
a  differential  between  sight  and  arrival  draft  terms. 

Mixed  carloads  of  flour  and  feed  are  usually  sold  on 
arrival-draft  terms,  but  for  straight  carloads  of  feed  a 
sight  draft  is  used. 

A  different  practice,  however,  is  found  in  the  ease  of 
less  than  carload  shipments  and  local  deliveries,  either 
from  millers  or  their  branch  houses.  These  sales  are 
usually  made  on  open  account.  Thirty  days  is  frequently 
specified,  although  some  variations  are  found,  such  as  the 
use  of  20-day  terms,  semi-monthly  and  weekly  settlements, 
and  proximo  terms.  In  a  few  eases,  C.  0.  D.  and  net  10- 
day  terms  are  also  used.  For  sales  of  this  kind,  a  cash 
discount  is  rarely  given,  but  may  amount  to  1  or  2  per 
cent  10  days  where  net  terms  are  30  days.  In  place  of  a 
cash  discount  of  this  kind,  the  use  of  a  price  differential, 
such  as  10  cents  per  barrel  for  payment  within  10  days, 
is  also  reported. 

These  two  classes  of  terms — arrival  draft  and  net  30  days 
— are  generally  used  in  the  trade,  in  particular  by  the  larger 
middle  western  millers.  In  several  sections,  however,  cer- 
tain variations  are  found.  In  the  Southeast,  there  is  con- 
siderable use  of  both  open  account  and  trade  acceptance, 
the  latter  showing  relative  gain  since  1917,  at  the  expense 
of  the  open  account  and  arrival  draft.  Most  of  these  ac- 
ceptances are  for  30  days,  and  a  small  number  for  60  days, 
but  90-day  acceptances  are  very  rare.  In  some  cases,  at- 
tempt is  made  to  obtain  an  increased  price,  ranging  from 
10  to  20  cents  per  barrel,  where  acceptances  are  used. 
Local  open  accounts  are  generally  collected  twice,  but 
sometimes  only  once  a  month,  but  open  accounts  in  inter- 
state business  generally  run  for  30  days. 

In  Texas,  the  open-account  system  is  largely  used  for 
carload  shipments,  which  are  mainly  mixed  cars,  as  well 


THE  FOODSTUFFS  INDUSTRIES  195 

as  for  less  than  carload  lots.  Carload  shipments  are  esti- 
mated to  comprise  80  per  cent  of  the  business.  The 
majority  of  the  accounts  run  for  30  days.  Texas  millers 
ascribe  the  origin  of  this  system  (instead  of  the  arrival- 
draft  system,  which  is  in  general  use  in  other  sections)  in 
considerable  measure  to  lack  of  capital  on  the  part  of  the 
retail  buyer,  while  su*bsequently  highly  competitive  condi- 
tions have  also  operated  to  prevent  attempts  to  substitute 
the  draft.  From  September,  1917,  to  July,  1918,  the  busi- 
ness was  on  a  cash  basis,  but  the  old  custom  has  since  been 
restored. 

In  the  Pacific  Coast  and  inter-mountain  territories,  dis- 
tinction in  terms  is  made,  not  between  carload  and  less 
than  carload  shipments,  but  between  inter-territory  and 
"outside"  shipments,  that  is,  to  territory  east  of  the  inter- 
mountain  states.  Sales  to  local  territory  are  estimated 
to  amount  to  90  per  cent  of  California,  75  per  cent  of 
Oregon,  100  per  cent  of  Seattle,  25  per  cent  of  Spokane 
and  25  per  cent  of  Utah  business.  Sales  to  outside  territory 
are  largely  made  against  arrival  draft,  although  the  sight 
draft  is  also  used  by  California  millers.  Sales  on  open 
account,  usually  running  30  days,  are  confined  almost  en- 
tirely to  local  business. 

It  has  been  stated  that  up  to  4  years  ago  practically  all 
flour  in  the  Northwest  was  sold  on  open  account,  due  to 
the  necessity  of  the  flour  manufacturer  financing  the  re- 
tailers.   This  was  attributed  to 

the  country  merchants  being  small  and  being  required  to  carry 
ranchmen  and  logging*  concerns  for  larger  amounts  and  longer 
periods  than  is  necessary  for  the  dealers  in  the  middle  west;  to 
poorer  roads  in  the  country  districts  requiring  larger  accumula- 
tion of  stocks  for  winter  consumption;  to  seasonal  weather  condi- 
tions in  Alaska  requiring  larger  aceuniulation  of  stocks,  and  to 
the  necessity  of  salmon  canneries  purchasing  canning  season's  re- 
quirement of  flour  in  spring  and  early  summer  to  be  transported 


196    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

at  the  time  other  cannery  supplies  are  provided  for  remote 
canneries  along  the  coast  here  and  in  Alaska. 
During  the  last  2  years,  however,  acceptances  have  also 
been  used,  running  for  30  days  in  the  Oregon,  Seattle  and 
Spokane  districts  and  not  over  45  days. in  Utah.  In  Oregon 
and  Seattle,  local  sales  are  now  generally  handled  by 
acceptances,  but  in  California  nearly  all  local  sales  are 
made  on  30-day  open  account.  In  several  of  these  dis- 
tricts, the  use  of  a  cash  discount,  such  as  ^  per  cent,  for 
payment  within  10  days  after  delivery,  or  the  use  of  a 
price  differential  where  arrival  draft  terms  are  employed, 
is  reported.  In  addition  to  this  local  testimony,  several 
middle  western  millers  also  report  changes  in  terms  which 
have  taken  place  in  the  inter-mountain  territory.  It  is 
stated  that  during  the  past  several  years  arrival  draft 
terms  have  been  replacing  the  former  30  to  90-day  open 
account  terms  on  carload  shipments  to  these  sections. 

Sugur  Refining. — Refiners  sell  refined  sugar  largely  on 
terms  of  2  per  cent  for  payment  within  7  days  after  arrival 
of  shipment,  but  prior  to  1911,  the  discount  was  1  per  cent. 
The  eastern  refiners  first  changed  in  April,  while  beet 
sugar  refiners  followed  later  in  the  year,  the  terms  to  apply 
to  new-crop  sugars.  The  change  was  due  to  representations 
from  wholesale  grocers,  extending  over  a  considerable 
period  of  time.  This  business  had  been  considered  un- 
profitable, and  it  was  estimated  at  that  time  that  it  com- 
prised about  20  to  25  per  cent  of  their  total  business.  It 
was  stated  in  1910  that  the  gross  return  on  it  was  not  over 
3  per  cent,  as  against  an  average  cost  of  doing  business  of 
6  per  cent.® 

*  This  estimate,  however,  is  considerably  less  than  figures  obtained 
in.  a  study  made  a  number  of  years  later.  Total  expense  for  108 
firms,  chiefly  for  the  year  1916,  ranged  from  6.7  per  cent  of  net 
sales  to  13.74  per  cent,  9.5  per  cent  being  most  common;  for  145 
firms  for  1918  from  6.15  per  cent  to  14.79  per  cent,  9.1  per  cent 
being  most  common;  and  for  159  firms  for  1919  from  4.35  per  cent  to 
14.71  per  cent,  9.1  per  cent  being  most  common. — Harvard  University 
Bureau  of  Business  Research,  Bulletins  No.  9,  No.  14  and  No.  19. 


THE  FOODSTUFFS  INDUSTRIES  197 

The  only  frequent  departure  from  these  terms  is  in  the 
case  of  local  deliveries  by  truck,  where  10  days  from  date 
of  delivery  is  generally  given. 

Coflfee,  Tea  and  Spices. — Most  coffee  roasters,  as  well  as 
spice  grinders,  import  to  a  greater  or  lesser  extent.  Whole- 
sale grocers  as  a  rule  buy  coffee  and  spices  from  the  roasters 
and  grinders,  although  a  considerable  number  do  their  own 
roasting  and  some  import  these  items  as  well.  Practically 
all  importers  of  spices  also  act  as  jobbers.  Sales  are  made 
largely  to  grinders,  who  put  up  the  product  in  small  pack- 
ages, and  to  canning  factories.  Grinders  sell  largely  to 
wholesale  grocers,  although  they  also  make  some  sales  to 
jobbers  and  retailers. 

Green  coffee  is  largely  sold  on  a  90-day  basis,  with  a 
discount  for  anticipation  at  the  rate  of  8  per  cent  per 
annum,  which  amounts  to  a  2  per  cent  discount  for  cash. 
A  considerable  amount  of  coffee  is  also  imported  on  a  cost 
and  freight  basis.  In  this  case  a  net  price  is  quoted  the 
purchaser  at  the  foreign  port  of  shipment  on  presentation 
of  shipping  documents  under  an  irrevocable  letter  of  credit 
previously  issued.  Small  jobbing  quantities,  namely  lots 
of  less  than  250  bags,  almost  invariably  carry  a  1  1/2  per 
cent  discount.  In  some  eases,  full  settlement  is  insisted 
upon  in  30  days.  Sales  of  roasted  coffee  to  jobbers  usually 
carry  terms  of  2  per  cent  10  days,  net  60  days,  and  sales 
by  wholesalers  to  retailers,  whether  the  coffee  is  in  packages 
or  in  bulk,  are  generally  made  upon  the  same  terms,  al- 
though in  recent  years  a  considerable  number  of  firms  have 
reduced  the  60-day  terms  to  30  days.  It  has  been  stated 
that  "it  is  the  general  opinion  of  the  trade  to  make  the 
terms  standard  (both  for  tea  and  coffee)  and  the  practice 
is  30  days  net  with  a  discount  of  1  per  cent."  Several 
firms  state  that  they  use  these  terms. 

Terms  on  tea  are  longer  and  larger  discounts  are  allowed 
than  on  coffee.    Importers  grant  jobbers  time  running  from 


198    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

60  days  to  4  months,  large  use  being  made  of  terms  of  3 
per  cent  10  days,  net  4  months.  Considerable  business  is 
also  done  on  3  per  cent  30  days,  and  it  has  been  stated  that 
up  to  1  or  2  years  ago  the  amount  sold  on  such  terms  was 
as  great  as  that  sold  on  10  days'  time.  Sales  by  wholesalers 
to  retailers  also  carry  varying  terms,  the  cash  discount 
running  from  2  to  5  per  cent  and  net  terms  from  60  days 
to  4  months.  Three  per  cent  30  days  is  often  found,  while 
some  houses  continue  to  give  4  per  cent  10  days,  net  4 
months,  but  the  latter  terms  are  confined  largelj''  to  sales  to 
small  jobbers.  Some  instances  of  a  shortening  of  terms  are 
reported,  such  as,  for  example,  to  2  per  cent  10  days,  net 
60  days. 

Sales  on  whole  spices  by  importers  for  many  years  have 
carried  terms  of  1/2  per  cent  7  days,  net  30  days,  pur- 
chasers customarily  discounting  their  bills.  The  grinders, 
however,  usually  sell  ground  spices  on  terms  of  1  per  cent 
10  days,  net  30  days,  but  in  some  cases  they  give  a  discount 
of  2  per  cent.  Whole  spices  on  sales  to  the  retail  trade 
usually  carry  terms  of  1  per  cent  10  days,  net  30  days. 

Confectionery.'^ — Manufacturers  of  candy  sell  both  to 
wholesalers  and  retailers.  There  is  a  difference  of  opinion 
as  to  the  relative  proportion  of  sales  to  each  class  of  pur- 
chasers. Some  estimates  place  sales  to  wholesalers  at 
slightly  less  than  sales  to  retailers,  while  others  believe  that 
sales  to  wholesalers  are  far  in  excess.  Bulk  candies,  packed 
in  pails  and  barrels,  are  sold  chiefly  to  wholesalers,  but  a 
considerable  proportion  of  package  goods,  such  as  fancy 
chocolates,  are  sold  direct  to  retailers. 

Terms  to  the  wholesale  trade  are  usually  2  per  cent  10 
days,  net  30  days.  A  very  considerable  proportion  of 
business,  however,  is  done  on  60-day  terms.     It  is  stated 

^Acknowledgment  is  due  Mr.  Walter  E.  Hughes,  Secretary-Treas- 
urer, National  Confectioners'  Association  of  the  United  States,  for 
.reading  this  section. 


THE  FOODSTUFFS  INDUSTRIES  199 

that  sales  in  some  cases  now  carry  a  15-day  discount  period, 
while  most  of  such  sales  bear  proximo  terms.  It  is  esti- 
mated that  about  50  per  cent  of  sales  of  the  wholesalers, 
in  general,  are  discounted,  but  in  New  York  State,  manu- 
facturers place  the  proportion  at  from  70  to  80  per  cent. 

Manufacturers'  terms  to  retailers  are  generally  the  same 
as  those  given  to  wholesalers.  Manufacturers  and  whole- 
salers selling  retailers  in  the  Rocky  Mountain  and  Pacific 
Coast  States,  about  two  or  three  years  ago,  began  to  give 
them  a  discount  of  only  1  per  cent,  but  the  old  terms  have 
again  been  restored. 

Wholesalers'  terms  to  retailers  are  somewhat  longer  in 
certain  cases  than  are  terms  given  by  manufacturers  to 
wholesalers.  Sixty  days  is  stated  to  be  frequent,  although 
the  terms  are  largely  1  per  cent  10  days,  net  30  days.  Sev- 
eral variations  are  found.  In  some  sections  a  2  per  cent 
discount  is  allowed,  while  in  other  sections  a  discount  is 
granted  for  semi-monthly  settlements  when  salesmen  call. 

Tobacco  Manufactures.^ — There  are  two  principal  classes 
of  tobacco  products — cigars,  and  the  so-called  manufac- 
tured products,  comprising  cigarettes,  snutf,  chewing 
tobacco,  plug,  twist,  etc.  Several  large  manufacturers 
dominate  the  latter  industry,  and  well-advertised  brands 
are  the  rule.  In  the  case  of  cigars,  however,  the  situation 
is  different.  Much  greater  difficulty  has  been  experienced 
in  adapting  machinery  to  the  manufacturing  process,  and 
there  are  over  1,100  cigar  factories.  A  considerable  number 
of  cigars  are,  of  course,  sold  under  well-advertised  brands, 
but  this  is  by  no  means  the  rule  in  the  industry. 

The  terms  in  use  reflect  this  situation.  Terms  on  the 
manufactured  products  have  been  practically  standard- 
ized for  a  long  time  at  2  per  cent  10  days.  These  terms 
apply  both  to  sales  by  manufacturers  and  sales  by  jobbers. 

*  Acknowledgment  is  due  Mr.  Charles  Dushkind,  Managing  Director, 
Tobacco  Merchants '  Association  of  the  U.  S.,  for  reading  this  section. 


200    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Practically  all  dealers  take  advantage  of  the  cash  discount ; 
supplies,  with  the  exception  of  rural  districts,  are  purchased 
from  week  to  week,  and  in  sales  to  the  small  trade  the 
discount  has  already  been  deducted  when  quoting  the  price. 
On  the  other  hand,  terms  with  respect  to  cigars  are  of  two 
kinds.  Well-advertised  brands  carry  approximately  the 
same  terms  as  do  cigarettes,  namely,  2  per  cent  10  days 
to  30  days.  Recently  some  manufacturers  who  sell  only 
to  jobbers  have  come  to  a  net  10-day  basis.  The  other 
brands,  however,  carry  longer  terms  and  there  is  little 
standardization.  Terms  to  the  jobber  vary  from  net  10 
days  to  net  30  days,  with  a  cash  discount  of  from  1  to  2 
per  cent  in  certain  cases,  and  the  jobber  generally  takes  the 
discount.    Jobbers  usually  grant  retailers  longer  terms. 

Wholesale  Groceries. — ^Wholesale  grocers  handle  a  great 
variety  of  articles,  and  the  business  thus  often  differs  con- 
siderably from  house  to  house.  In  some  of  the  large 
markets,  such  as  New  York  and  Chicago,  there  are  manu- 
facturing jobbers  who  do,  to  a  great  extent,  a  national  and 
semi-national  business,  and  traders  who  sell  staple  goods 
practically  for  cash  at  cut  prices,  in  addition  to  houses 
which  do  the  usual  wholesale  grocery  business.  In  the 
Middle  West  and  West,  houses  are  more  or  less  generally 
of  the  last  type.  In  these  sections,  moreover,  less  compe- 
tition is  experienced  from  exclusive  tea  and  coffee  and  other 
specialty  jobbers  than  in  the  more  thickly  populated  terri- 
tories. 

Organized  activities  of  wholesale  grocers  with  respect 
to  terms  of  sale  have  taken  a  twofold  direction — in  connec- 
tion with  their  purchases  and  with  their  sales.  In  1907, 
the  year  after  it  was  founded,  the  National  Wholesale  Gro- 
cers' Association  created  a  Committee  on  Discounts,  which 
numbered  among  its  activities  consultation  with  manufac- 
turers in  an  endeavor  to  obtain  more  favorable  terms.  The 
subsequent  year  a  Standing  Purchase  Discount  Committee 


THE  FOODSTUFFS  INDUSTRIES  201 

was  created  to  carry  on  this  work,  the  name  being  changed 
in  1914  to  Discount  for  Cash  Committee.  The  general  aim 
throughout  has  been  to  obtain  a  cash  discount  of  2  per  cent 
upon  the  articles  purchased  by  the  wholesale  grocer.  This 
has  involved  effort  to  increase  discounts  upon  certain  com- 
modities, and  protest  when  manufacturers  sought  to 
decrease  or  eliminate  discounts  previously  in  effect,  as  well 
as  effort  to  institute  a  discount  for  others  previously  sold 
upon  net  terms.  In  the  instances  remarked  above  in  con- 
nection with  various  food  products,  of  increase  in  discount 
as  a  result  of  representations  from  wholesale  grocers,  the 
latter  were  in  general  represented  by  the  committee  men- 
tioned above.  Prominent  among  the  commodities  for  which 
effort  has  been  made  to  obtain  increased  discounts  may  be 
mentioned  rice,  canned  goods,  sugar,  California  dried  fruits 
and  nuts,  beans,  sirup  and  molasses,  macaroni,  etc.  In 
order  to  obtain  the  larger  discount,  the  grocer  is  willing 
to  pay  prior  to  arrival  of  the  goods.  The  committee  has 
frequently  and  strongly  called  attention  to  the  necessity 
for  prompt  payment  within  the  discount  period.  Grocers 
in  large  measure  take  advantage  of  the  cash  discounts  of- 
fered on  their  purchases  and  it  is  generally  held  that  the 
firm  which  does  not  do  so  is  not  in  a  position  to  make  a  net 
return  on  its  investment,  as  net  profits  in  many  instances 
are  stated  to  equal  the  amount  of  the  cash  discounts 
received. 

With  reference  to  its  construction  of  the  term  "discount 
for  cash,"  the  National  Wholesale  Grocers'  Association 
states  that  "a  discount  for  cash  is  regarded  by  the  whole- 
sale grocer  as  a  banking  proposition  or  practice."  It 
considers  that  the  2  per  cent  discount  commonly  granted 
the  wholesale  grocer  is  not  excessive  as  compared  with  dis- 
counts in  certain  other  lines,  and  is  fully  justified  by  the 
advantages  which  it  holds  accrue  to  the  grantor  of  the 
discount.     It  states  that  it  points  out  these  advantages. 


202    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

"leaving  it  for  the  particular  manufacturer  to  determine 
whether  it  would  be  to  his  own  advantage  and  sound  busi- 
ness policy  to  adopt  the  discount  for  cash  as  a  part  of  his 
sales  policy.  .  .  .  Among  these  advantages  are  the  elim- 
ination of  the  credit  risk  and  of  the  moral  risk,  not  to 
mention  the  development  and  maintenance  of  a  spirit  of 
good  will  between  the  buyer  and  seller.  In  addition  to  the 
immediate  use  of  the  money,  the  advantages  from  the 
elimination  of  the  credit  and  moral  risks  are  perhaps  the 
most  evident  considerations  involved,  obviating,  as  they 
do,  the  cost  of  a  considerable  amount  of  expensive  credit 
machinery,  which  cost  increases  whenever  credit  terms  are 
lengthened,  and  whenever  the  proportion  of  the  entire 
business  done  upon  a  credit  basis  increases.  It  is  held  also 
that  the  practice  is  financially  and  economically  sound,  in 
that  it  releases  capital  for  constructive  work  and  makes  it 
possible  to  increase  output  and  turnover  and  thus  reduce 
cost  to  the  trade  and  the  public." 

In  connection  with  terms  upon  the  products  he  sells, 
the  activities  of  the  wholesale  grocer  have  again  taken  a 
twofold  direction.  He  has  considered  both  the  cash  dis- 
count and  the  net  terms.  The  guiding  principle  in  the 
former  case  has  been  to  avoid  as  far  as  possible  granting 
a  larger  discount  than  is  received  upon  the  commodity. 
In  the  latter  case  there  has  been  a  consistent  effort  to 
shorten  terms,  1  per  cent  10  days,  net  30  days  being  the 
goal,  as  well  as  emphasis  upon  the  need  to  insist  upon 
prompt  collections.  The  opposition  of  the  wholesale  grocer 
to  the  use  of  the  trade  acceptance  is  due  in  large  measure 
to  belief  that  terms  would  be  lengthened  through  its  use. 
Considerable  attention  has  been  directed  to  the  matter 
of  shorter  terms  during  the  past  several  years.  At  least 
12  state  and  district  wholesale  grocers'  associations,  located 
principally  in  the  Middle  West  and  West,  now  obtain  from 
certain  of  their  members  monthly  reports  showing  the  per- 


THE  FOODSTUFFS  INDUSTRIES  203 

centage  of  outstandings,  that  is,  accounts  and  notes 
receivable  at  the  close  of  the  month  in  question  divided  by 
sales  during  the  month.  The  shortening  of  terms  and 
increase  .in  promptness  of  collections  are  illustrated  by  the 
figures  already  given.^ 

During  the  years  1908-1910,  inclusive,  there  existed  a 
Sales  Discount  Committee  of  the  National  Wholesale  Gro- 
cers' Association,  which  considered  the  question  of  terms 
upon  the  commodities  sold.  In  the  wholesale  grocery  line, 
the  construction  of  a  set  of  terms  involves  fixing  several 
standard  sets  of  cash  discounts  and  net  terms,  and  classify- 
ing thereunder  the  commodities  handled,  each  commodity 
being  assigned  to  one  of  the  sets  of  terms.  The  matter  was 
discussed  at  the  1918  convention,  at  which  the  committee 
presented  a  report  favoring  1  per  cent  10  days,  net  30  days 
for  the  general  line,  with  terms  of  1  1/2  per  cent  10  days, 
net  60  days  for  domestic  canned  goods,  soap,  coffee,  ground 
spices,  etc.,  and  3  per  cent  10  days,  net  4  months,  for  teas 
in  original  packages,  while  terms  on  tobacco  manufactures 
were  optional.  The  discussion  which  followed  revealed 
considerable  diversity  in  existing  practice,  such  as  employ- 
ment of  a  15-day  period  in  place  of  10  days,  due  to  use 
of  salesmen  calling  on  the  trade  about  every  2  weeks  in 
making  collections,  and  non-adherence  to  the  discount 
period,  as  well  as  in  the  West  large  use  of  a  2  per  cent 
discount  upon  items,  such  as  canned  goods,  for  which  the 
report  permitted  1  1/2  per  "cent.  Nevertheless,  the  com- 
mittee report  recommending  the  employment  of  such  terms 
was  adopted.  The  report  of  the  committee  at  the  following 
convention  showed  considerable  adherence  to  the  classifi- 
cation, although  the  1  1/2  per  cent  discount  had  not  been 
adopted  by  a  large  territory  in  the  Middle  West  and  far 
West.  While  the  desire  appears  to  have  been  to  have  the 
terms  adopted  by  the  several  state  and  district  associations, 

•P.  100, 


204   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

only  two  specific  cases  of  endorsement  were  noted.  This 
ended  the  activity  of  the  National  Association  with  respect 
to  this  matter.  At  the  1910  convention,  the  committee  re- 
port called  attention  to  the  importance  of  the  subject,  and 
suggested  that  the  wholesale  grocers,  each  for  himself, 
should  see  that  sensible  business  methods  were  adopted  as 
to  discounts.  Thereafter,  the  field  was  left  entirely  to  the 
state  and  district  associations.  At  least  12  of  the  latter, 
in  particular  in  the  Middle  West  and  West,  have  adopted 
standard  classifications  which  were  recommended  for  the 
use  of  members.  This  is  ascribed  by  a  leading  authority 
largely  to  the  competitive  conditions  noted  in  the  opening 
paragi-aph  of  this  section.  It  should  also  be  stated  that 
these  associations  are  in  large  measure  those  which  prepare 
reports  of  outstandings. 

The  classifications  are  supposed  in  certain  cases  to  rep- 
resent current  practice,  while  in  other  eases  desirable 
changes  may  be  introduced,  although  not  yet  in  current 
use.  Changes  have  been  made  by  a  considerable  number 
of  these  associations  during  the  past  several  years,  most 
frequent  being  the  elimination  of  60-day  items.  In  some 
localities,  terms  are  now  considerably  shorter  than  called 
for  by  the  classification,  although  the  latter  has  not  been 
revised.  In  others  there  has  been  persistent  effort  to 
shorten  terms,  although  no  formal  action  has  been  taken. 
Among  the  associations  which  have  prepared  classifications, 
there  is  practically  universal  agreement  upon  general  terms 
of  1  per  cent  10  days,  net  30  days  for  the  majority  of 
items.  A  conspicuous  exception  is  southern  California, 
where  terms  of  1  1/2  per  cent  15  days,  proximo,  net  60 
days,  prevail,  the  terms  of  1  1/2  per  cent  15  days,  net  30 
days  having  been  changed  to  1  per  cent  10  days,  net  30 
days  in  northern  California  August  1,  1918.  In  other 
cases  *  *  proximo ' '  and  semi-monthly  terms  are  also  specified, 
in  particular  for  aggregate  purchases,  as  well  as  in  some 


THE  FOODSTUFFS.  INDUSTRIES  205 

cases  1  1/2  per  cent 'discount  and  in  other  cases  a  15-day 
discount  period.  In  one  instance  distinction  is  made  be- 
tween city  and  country  sales,  semi-monthly  settlement  with 

1  per  cent  discount  prevailing  for  the  former,  the  regular 
terms  of  1  per  cent  10  days,  net  30  days  for  the  latter. 
In  another  case  1  1/2  per  cent  is  given  in  cities  upon  all 
items  for  settlement  either  weekly  or  semi-monthly,  such 
as  the  5th  and  20th,  as  compared  with  discounts  of  1  and  2 
per  cent,  according  to  the  item  in  question,  for  country 
sales. 

Turning  to  several  of  the  more  important  items  for  which 
different  terms  are  specified,  domestic  canned  fruits  and 
vegetables  in  certain  sections  carry  a  discount  of  1  1/2  or 

2  per  cent,  although  canned  meats  and  soups  and  condensed 
milk  carry  only  1  per  cent.  When  sold  in  a  larger  way, 
and  by  the  wholesaler  more  or  less  in  competition  with 
the  canner,  domestic  canned  fruits  and  vegetables  ordi- 
narily carry  a  discount  of  1  1/2  or  2  per  cent.  While  30 
days  is  generally  the  time  within  which  bills  are  due  net, 
60  days  is  specified  in  several  cases,  as  well  as  a  1  per  cent 
discount  in  others.  A  recent  study  extending  over  5  years 
and  covering  over  1,000  retail  grocers  shows  that  over  two- 
thirds  of  the  retailers  purchased  their  supply  of  canned 
fruits  and  vegetables  entirely  from  wholesale  grocers,  while 
over  20  per  cent  additional  so  purchased  at  least  part  of 
their  supply.^" 

Flour  largely  carries  net  10  day  terms,  although  in  some 
cases  30  days  is  specified.  The  study  above  referred  to 
shows,  however,  that  a  considerable  amount  of  flour  is 
purchased  direct  from  manufacturers  by  retail  grocers. 
Over  35  per  cent  of  the  latter  bought  all  their  flour  in  this 
manner,  and  of  about  one-third  who  did  not  make  exclusive 
purchases  from  manufacturers,  a  large  majority  bought 
over  one-half  direct.  .Sugar  in  considerable  measure  carries 

"Bulletin  No.  13. 


206    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

the  general  terms,  although  in  some  instances  net  10  days 
and  net  30  days  occur.  In  Chicago  1  1/2  per  cent  10  days  is 
generally  given  (although  not  adopted)  and  in  California 
an  allowance  per  100  pounds  is  made,  amounting  prior  to 
August,  1917,  to  15  cents  10  days  in  southern  California 
and  25  cents  10  days  in  northern  California,  and  since  that 
time  in  southern  California  to  10  cents  for  payments  by 
the  10th  and  25th,  in  northern  California  to  10  cents  15 
days  (changed  August,  1918,  to  10  days).  The  study  above 
referred  to  showed  that  sugar  is  purchased  mainly  from 
wholesale  grocers,  over  four-fifths  of  the  retailers  purchas- 
ing their  sugar  exclusively  from  that  source.  Meats  and 
lard,  a  decreasing  percentage  of  which  is  purchased  from 
wholesale  grocers,  in  general  bear  terms  of  net  10  days. 
However,  net  30  days  is  given  in  some  instances. 

Coffee  usually  carries  a  2  per  cent  discount,  while  60 
days  instead  of  30  clays  is  the  net  period  in  certain  cases. 
Forty-eight  per  cent  of  the  retailers  included  in  the  above 
study  purchased  coffee  exclusively  from  coffee  roasters  and 
specialty  wholesalers.  Tea  carries  a  2  per  cent  discount 
in  many  cases,  although  this  is  confined  in  some  instances 
to  package  teas  or  teas  in  less  than  original  amounts.  Four 
per  cent  10  days,  net  4  months  is  sometimes  given  on  teas 
in  bulk  or  in  original  packages.  According  to  the  above 
study,  36  per  cent  of  the  retailers  purchased  tea  only  from 
the  wholesale  grocer,  while  15  per  cent  so  purchased  a  part 
of  their  requirements.  Whole  spices  generally  bear  the 
''regular"  terms,  while  ground  spices  carry  instead  a  2 
per  cent  discount.  Tobacco,  which  over  60  per  cent  of  the 
retailers  bought  exclusively  from  wholesale  grocers,  in 
practically  all  cases  bears  a  2  per  cent  discount,  while  net 
terms  are  60  days  in  several  cases. 

A  considerable  amount  of  information  obtained  shows 
that  terms  actually  in  effect  correspond  roughly  to  fliose 
prepared  by  the  several  association?.    In  certain  sections  a 


THE  FOODSTUFFS  INDUSTRIES  207 

considerable  volume  of  business  appears  to  be  done  on 
60-day  terms,  while  in  various  parts  of  the  South  and  West 
(specific  instances  being  reported  from  Georgia,  Arkansas 
and  Idaho)  notes  are  taken,  and  the  retailer  may  be  car- 
ried until  maturity  of  crops  in  the  fall.  Terms  as  a  rule 
granted  in  the  South  have  been  approaching  closer  and 
closer  to  those  in  effect  in  other  parts  of  the  country.  In 
general,  a  large  percentage,  in  manj^  cases  over  50  per 
cent,  of  the  retail  grocers  take  advantage  of  the  cash  dis- 
count. A  good  check  upon  data  as  to  the  length  of  terms 
actually  in  use  is  afforded  by  the  statements  of  percentages 
of  outstandings  prepared  by  the  several  associations.  While 
discounted  accounts  serve  to  reduce  the  percentages,  an 
idea  is  given  of  the  promptness  with  which  collections  are 
made.  Returns  for  the  several  states  vary  considerably,  but 
fall  naturally  into  two  general  classes,  those  with  average 
percentage  ranging  at  present  roughly  from  about  70  per 
cent  to  100  per  cent,  and  those  with  average  percentage 
ranging  at  present  roughly  from  105  to  125  per  cent  or 
more.  In  the  former  group  fall  the  middle  western  states, 
in  particular  those  included  in  Federal  Reserve  district  No. 
7;  in  the  latter  several  eastern  and  southwestern  states 
and  California.  This  by  no  means  implies  homogeneity  in 
terms  within  any  given  group.  Wide  variation  is  shown 
in  the  reports  for  the  individual  houses :  the  extreme  per- 
centages in  the  California  report  for  February,  1922,  were 
72.2  and  186.0.  It  is  in  this  connection  that  the  policy  of  the 
house,  the  kind  of  trade  it  solicits,  and  the  items  which 
bulk  largest  in  its  business  must  be  considered.  Thus  also 
weekly  terms  may  in  certain  cases  be  made  to  restaurants, 
while  the  summer  hotel  trade  may  obtain  a  dating  of  several 
months  on  purchases  of  canned  goods,  etc. 


CHAPTER  XII 

THE   METAL   INDUSTRIES 

The  present  chapter  deals  with  a  group  of  articles  which, 
while  closely  related  in  their  origins,  are  in  very  different 
forms.  It  includes  both  metals  in  their  primary  state, 
staple  manufactures  of  these  metals,  such  as  steel  rails 
and  zinc  sheets,  and  their  more  highly  diversified  manu- 
factures, such  as  hardware  and  machinery.  All  of  them, 
however,  are  used  for  industrial  rather  than  consumptive 
purposes  in  the  ordinary  sense  of  the  term.  Hardware 
alone  provides  a  point  of  contact  with  the  small  purchaser. 

The  articles  may  be  grouped  into  three  classes.  Each  class 
has  its  distinctive  features  and  its  distinctive  terms.  First 
are  the  metals  and  their  staple  manufactures.  On  the  pri- 
mary forms,  terms  closely  approximate  cash,  while  they 
lengthen  as  the  degree  of  manufacture  increases  and  the 
articles  are  sold  in  smaller  lots  to  weaker  purchasers.  Sec- 
ond are  the  highly  manufactured  articles  of  relatively  small 
size,  such  as  hardware,  mill  supplies  and  "machinery." 
Unlike  the  first  class,  they  are  largely  distributed  through 
jobbing  channels,  although  dealers  in  ''machinery"  are 
manufacturers'  representatives  rather  than  dealers  in 
the  strict  sense.  Net  terms  vary  in  length  from  30  to  60 
days,  except  for  "machinery,"  where  the  period  is  30 
days.  Third  are  the  larger  manufactures,  such  as  ma- 
chinery proper,  railway  equipment  and  ships.  These  are 
generally  sold  on  a  cash  basis,  or  what  practically  amounts 
to  one,  in  that  periodical  payments  are  specified  as  the 
work  progresses.     At  times,  credit  is  given,  and  several 

208 


THE  METAL  INDUSTRIES  209 

notes  with  varying  maturities  may  be  used.  In  such  cases, 
it  is  usual  for  the  selling  manufacturer  to  retain  title 
and  use  a  chattel  mortgage,  conditional  sale  or  lease 
agreement. 

Iron  and  Steel.^ — The  general  organization  of  the  iron 
and  steel  industry  is  well  known.  Many  large  firms  exist 
which  manufacture  a  great  variety  of  products  for  the 
market,  and  themselves  produce  the  pig  iron  and  semi- 
finished steel  products  out  of  which  they  make  the  more 
highly  manufactured  articles.  Terms  in  general  have  been 
in  effect  for  a  considerable  number  of  years  and  substantial 
uniformity  in  terms  now  exists.  Prior  to  1900,  which  date 
may  be  taken  as  the  beginning  of  the  movement  towards 
consolidation  in  the  industry,  terms  were  considerably 
more  irregular  and  were  often  adapted  to  meet  the  special 
needs  of  the  customer,  extended  time,  such  as  from  4  to  8 
months,  with  correspondingly  high  cash  discounts,  being 
frequently  given  for  certain  classes  of  products. 

In  considering  the  terms  now  in  use,  it  should  be  noted 
that  broadly  speaking  the  cash  discount  is  greater  for  the 
more  highly  finished  products,  which  are  sold  both  in 
smaller  lots  and  to  different  classes  of  purchasers  than  are 
the  semi-finished  products.  It  is  stated,  moreover,  that 
the  commodities  bearing  only  a  1/2  per  cent  discount  are 
sold  on  a  close  margin  of  profit. 

Pig  iron,  whether  steel-making,  such  as  basic  and 
Bessemer,  or  foundry  or  forge,  is  sold  upon  terras  of  net 
30  days  from  date  of  invoice  or  average  date  of  monthly 
shipments.  The  larger  proportion  of  the  steel-making  pig 
iron,  however,  is  transported  in  molten  condition  to  steel 
works,  and  steel  products  during  the  initial  stages  of 
rolling,  such  as  ingots,  blooms,  and  slabs,   are  in  large 

^  Acknowledgment  is  due  Mr.  T.  H.  Taylor,  Assistant  General  Sales 
Agent,  American  Steel  and  Wire  Co.,  and  Mr.  J.  P.  Bender,  Credit 
Manager,  Bethlehem  Steel  Co.,  for  reading  this  section. 


210    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

measure  not  commercial  products.  Terms  for  billets, 
blooms  and  slabs,  into  which  the  ingot  is  rolled,  are  largely 
1/2  per  cent  10  days,  net  30  days. 

Terms  for  heavier  rolled  products  differ.  Standard  rails 
are  sold  on  terms  of  net  30  days  and  light  rails  on  terms 
of  1/2  per  cent  10  days,  net  30  days,  while  the  latter  terms 
obtain  also  for  structural  shapes  and  plates.  Standard 
shapes  are  sold  to  constructors  of  buildings  and  builders 
of  bridges,  ships,  cars,  etc.,  while  plates  are  sold  to  the 
same  group,  as  well  as  to  manufacturers  of  boilers  knd 
tanks.  Light-rolled  products,  such  as  merchant  and  sheet 
bars  and  wire  rods,  generally  carry  terms  of  1/2  per  cent 
10  days,  net  30  days,  and  these  terms  have  been  in  effect 
for  many  years.  It  is  stated  that  about  1900,  no  discount 
was  given  on  wire  rods.  Certain  types  of  merchant  bars 
are  sold  to  hardware  jobbers,  but  large  quantities  are  also 
sold  to  manufacturers  of  agricultural  implements,  vehicles, 
etc.,  and  some  are  further  manufactured  into  bolts,  nuts, 
spikes,  etc.  Sheet  bars  are  rolled  by  purchasers  into  black 
sheets,  used  for  roofing  and  making  stovepipe,  receptacles, 
etc.,  and  into  black  plate  used  in  the  manufacture  of  tin 
plate.  Wire  rods  provide  the  raw  material  for  the  wire  and 
wire  goods  industry. 

Rivets  (1/2  inch  and  larger  in  diameter)  and  spikes 
carrj'  terms  of  1/2  per  cent  10  days,  net  30  days;  bolts, 
nuts,  and  rivets  less  than  1/2  inch  in  diameter,  terms  of  1 
per  cent  10  days,  net  30  days.  Track  bolts  and  specially 
designed  bolts,  however,  carry  in  considerable  measure 
terms  of  net  30  days,  though  the  former  in  certain  cases 
bear  a  cash  discount  of  1/2  per  cent  10  days.  The  manu- 
facture of  these  products  is  relatively  concentrated.  There 
are  not  over  25  producers  of  bolts  and  nuts,  of  whom  all 
but  3  or  4  now  adhere  to  the  terms  given  above.  About 
1912,  an  unsuccessful  effort  was  made  to  reduce  the  dis- 
count and  net  terms  on  this  item  from  2  per  cent  10  days, 


THE  METAL  INDUSTRIES  211 

net  60  days,  but  a  similar  effort  several  years  later 
succeeded.  This  was  in  spite  of  the  strong  resistance  of 
the  hardware  jobbers,  who,  however,  handle  only  a  small 
part  of  the  total  output,  the  major  part  being  sold  direct 
by  the  manufacturers  to  industrial  consumers.  It  is  stated 
that  prior  to  1914  or  1915,  the  discount  on  rivets  was 
generally  1  per  cent. 

Wire  products,  including  wire  rope  and  smooth,  barbed, 
and'twisted  wire,  nails,  and  Voven  wire  fence  and  netting, 
carry  terms  of  2  per  cent  10  days,  net  60  days.  Similar 
terms  obtain  for  welded  tubes,  pipe,  and  other  welded 
tubular  products.  In  the  case  of  purchasers  to  whom  fre- 
quent shipments  are  made,  monthly  payment  is  permitted, 
terms  then  being  2  per  cent  10th  proximo.  Seamless  tubes 
and  other  seamless  products  carry  terms  of  2  per  cent.  10 
days,  net  30  days,  although  in  the  case  of  contracts  for  a 
considerable  periodical  supply  of  seamless  cylinders  the 
net  terms  are  increased  to  60  days.  Sheets  and  tin  mJll 
products,  including  black  sheets  and  tin  plate,  are  sold  on 
terms  2  per  cent  10  days,  net  30  days.  These  terms  have 
been  in  effect  for  12  to  15  years,  prior  terms  having  been 
respectively  2  per  cent  10  days,  net  60  days  and  1  per  cent 
10  days,  net  30  days. 

Copper,  Lead  and  Zinc.^ — For  the  present  purpose,  the 
distinguishing  characteristic  of  the  markets  for  the  non- 
ferrous  metals  in  their  primary  forms  may  be  considered 
to  be  the  absence  of  standardization,  both  in  marketing 
practice  and  in  terms.  A  large  speculative  interest  has 
always  existed  in  copper  and  in  zinc,  particularly  in  the 
former.  In  lead,  on  the  other  hand,  there  is  relative  con- 
centration of  production.  The  producing  companies  are 
only  12  in  number,  one  of  them  produces  35  per  cent  or 
more  of  the  total  output,  and  "its  policy  is  to  conduct  a 

•Acknowledgment  is  due  Mr.  C.  J.  Trench,  Editor,  The  American 
Metal  Market,  New  York,  for  reading  this  section. 


212   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

business  made  stable  by  maintaining  regular  customers  and 
prices  as  nearly  constant  as  conditions  permit."  It  is 
stated  that  only  5  per  cent  of  pig  lead  finds  its  way  into 
the  hands  of  jobbers  for  resale.  In  copper  and  zinc,  how- 
ever, the  percentage  so  handled  is  much  greater.  Estimates 
place  the  figure  for  copper  for  1919,  at  somewhere  around 
20  per  cent  of  the  total  output,  and  this  is  stated  to  have 
been  larger  than  normal.  A  very  much  larger  percentage 
of  the  output  of  zinc,  estimated  at  from  50  to  60  per  cent, 
passed  through  the  hands  of  dealers  at  that  time,  but  at 
present  they  are  probably  not  handling  over  20  per  cent. 
In  1920,  dealers  handled  a  large  portion  of  the  export  trade, 
but  there  has  been  virtually  no  export  business  for  a  year, 
and  dealers'  operations  in  the  domestic  market  have  also 
fallen  considerably.  The  proportion  handled  by  jobbers 
thus  varies  considerably  from  time  to  time.  It  is  a  well- 
known  market  fact  that  since  1919  the  copper  producers 
have  been  limiting  strictly  the  amount  sold  to  jobbers,  in 
order,  it  is  said,  to  avoid  a  repetition  of  the  situation  exist- 
ing at  that  time  when  the  jobbing  interests  to  whom  sales 
had  been  freely  made  dominated  the  market.  The  general 
practice  varies  among  the  different  producers,  some  of  them 
pursuing  the  same  policy  as  the  lead  companies. 

The  effect  of  these  factors  upon  terms  may  be  summarized 
by  stating  that,  strictly  speaking,  for  these  metals  there 
are  no  ''regular"  terms,  such  as  exist  in  many  other  lines. 
While  producers  prefer  cash  against  documents,  they  en- 
deavor to  meet  the  wishes  of  their  customers,  and,  as  a 
rule,  are  Avilling  to  sell  on  the  terms  preferred  by  the  latter, 
provided  payment  is  made  within  30  days  from  date  of 
shipment. 

Producers'  terms  on  ingot  copper  vary.  Instances  found 
are  cash  against  documents,  cash  on  delivery,  sight  or 
arrival  draft,  10,  20,  or  30-day  draft,  and  up  to  30  days' 
open  account.     Formerly  30  days  from  arrival  was  also 


THE  METAL  INDUSTRIES  213 

given ;  but  this  was  changed,  about  the  opening  of  1920,  to 
10  days  from  date  of  shipment  if  made  from  an  eastern 
refinery  and  30  days  if  made  from  a  far  western  refinery. 
This  eliminates  the  financing  by  the  producer  required 
under  the  earlier  terms,  also  disputes  as  to  what  constitutes 
date  of  arrival,  which  were  frequent.  Prior  to  the  war,  a 
discount  of  1/2  per  cent  10  days  was  usually  granted  large 
consumers,  net  terms  being  30  days,  but  this  was  largely 
eliminated  during  the  war,  copper  being  sold  chiefly  on  a 
cash  basis.  Producers  are  again  allowing  large  consumers 
30-day  terms. 

Pig  lead  is  sold  by  the  larger  producers  on  terms  of 
cash  on  arrival  at  the  buyer's  plant,  a  sight  draft  with  bill 
of  lading  attached  being  used  in  most  eases  with  instruc- 
tions to  the  bank  to  hold  the  draft  awaiting  the  arrival  of 
the  shipment.  A  small  percentage  of  sales  call  for  cash 
in  10  or  15  days  from  date  of  shipment. 

The  larger  producers'  terms  on  slab  zinc  are  similar  to 
those  allowed  on  lead.  Sales  of  prime  western  zinc  during 
the  early  part  of  the  war,  when  scarcity  existed,  were  al- 
most wholly  on  sight  draft.  Cash  on  arrival  or  sight  draft 
are,  however,  by  no  means  exclusively  employed.  Terms  in 
some  cases  vary  from  net  10  days  to  net  30  days  from  date 
of  shipment,  according  to  length  of  time  required  for 
delivery.  It  is  stated  that  since  the  middle  of  1917,  when 
prime  western  zinc  has  been  in  free  supply,  leading  con- 
sumers have  been  able  to  re-establish  such  terms.  It  may 
be  noted  that  they  by  no  means  always  involve  a  longer 
period  than  in  the  ease  of  cash-on-arrival  terms,  as  ship- 
ments from  western  centers  to  eastern  consuming  works 
are  frequently  3,  4,  or  5  weeks  in  transit.  High-grade  zinc, 
which  is  used  extensively  to  make  the  better  quality  brass 
and  for  rolling  sheets,  largely  carries  a  cash  discount  of 
1/2  per  cent  for  payment  within  10  days  from  date  of 
shipment,  or  in  some  cases  with  sight  or  10-day  draft.     In 


214   THE  MECHANISM^  OF  COMMERCIAL  CREDIT 

special  cases  the  terms  to  purchasers  of  high  standing  are 
made  1/2  per  cent  10  days,  net  30  days.  There  has  been  a 
movement  during  the  last  several  years  looking  to  the  for- 
mulation of  standard  terms  for  the  industry. 

Jobbers'  terms  on  copper  and  zinc  are  stated  to  be  largely 
1/2  per  cent  10  days,  net  30  days,  although  on  carload  lots 
in  competition  with  producers  net  cash  on  arrival  may  be 
specified.    Pig  lead  is  sold  largely  on  terms  of  net  30  days. 

Terms  on  manufactures  of  the  non-ferrous  metals  are 
not  the  same  as  on  the  metals  themselves  in  their  primary 
forms.  Terms  on  brass  and  copper  products,  including 
rods,  wire,  sheet  and  tubing,  are  largely  1  per  cent  10  days, 
net  30  days,  the  discount  in  some  cases  being  given  for 
semi-monthly  settlements  by  the  5th  and  20th.  These  terms 
have  been  in  effect  for  many  years.  In  certain  cases  the 
discount  was  reduced  during  the  war  to  1/2  per  cent  and 
in  some  cases  later  eliminated,  although  subsequently,  in 
general,  restored  to  the  former  figure  of  1  per  cent. 

Trade  sheet  lead  and  lead  pipe  carry  terms  of  2  per 
cent  10  days,  net  30  days ;  bar  lead  and  solder  carry  terms 
of  net  30  days;  and  chemical  sheet  lead  and  chemical  lead 
pipe  carry  terms  of  1  per  cent  10  days,  net  30  days.  The 
first  two  classes  of  items  are  sold  largely  to  jobbers  of 
plumbing  supplies  and  to  plumbers,  the  last  to  the  chemical 
trade.  The  difference  in  the  discount  is  accounted  for  by 
the  difference  in  size  and  credit  standing  of  the  purchaser. 
While  a  1  per  cent  discount  is  sufficient  inducement  to  the 
large  concerns  of  first-class  credit  standing  in  the  chemical 
trade  to  generally  discount  their  purchases,  it  is  insuffi- 
cient in  case  of  jobbers  of  plumbing  supplies  and  plumbers. 

Rolled  zinc  products  are  regularly  sold  on  a  cash  basis, 
sight  draft  against  bill  of  lading  being  used  in  many  cases. 
A  cash  discount  of  3  per  cent  is  allowed.  These  terms  have 
been  in  effect  for  many  years.  By  far  the  larger  part 
of  these  commodities  is  sold  to  jobbers  as  against  con- 


THE  METAL  INDUSTRIES  215 

sumers,  although  the  proportion  varies  considerably  from 
month  to  month. 

Hardware.^ — The  hardware  field  is  exceedingly  complex. 
A  large  number  of  items  are  included  under  the  term,  and 
the  limits  are  vague  and  ill-defined  at  points,  merging  into 
other  lines.  Hardware  distributors  have  extended  their 
activities  to  include  related  lines  as  well,  automobile  ac- 
cessories affording  the  latest  instance,  while  some  of  the 
regular  hardware  items  are  handled  by  other  merchants 
also.  Within  the  recognized  limits  of  the  field  itself,  there 
is  no  standard  classification  of  items  into  a  number  of  types. 
In  addition,  the  lines  produced  by  the  individual  manu- 
facturers differ  greatly. 

In  order  to  clarify  the  discussion  as  far  as  possible, 
several  of  the  classifications  in  actual  use  will  be  presented. 
The  war  service  committee  of  the  American  Hardware 
Manufacturers '  Association  had  the  following  sections : 

Wire  goods  and  heavy  hardware. 

Builders'  hardware,  metal  ware,  small  castings  and  stampings. 

Cutlery. 

Hardware  tools. 

Agricultural  tools. 

General  hardware. 

The  internal  organization  of  the  individual  hardware 
jobber,  however,  by  no  means  follows  the  same  lines.  Fol- 
lowing are  the  lists  of  departments  of  two  hardware 
jobbers.  The  number,  of  course,  will  vary  with  the  size 
of  the  house. 

House  No.  1 

Builders'  hardware. 

Mechanics'  tools. 

Brass  goods,  valves,  pipe  fittings. 

Steel  bars,  plates,  sheets,  light  rails,  etc. 

■Acknowledgment  is  due  Mr.  T.  James  Fernley,  Secretary-Treas- 
urer, National  Hardware  Association,  for  reading  this  section. 


216    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Wrought  pipe  and  boiler  tubes. 

Cutlery,  fishing  taekle,^sporting  goods,  etc. 

Fire  arms  and  ammunition. 

Nails,  horseshoes,  barbed  wire,  etc. 

Household  goods,  enameled,  agate  and  tin  ware,  etc. 

House  No.  2 

Auto  accessories. 

Builders'  hardware. 

Cutlery,  watches,  and  clocks. 

Electrical  supplies. 

Heating  and  plumbing. 

Heavy  hardwai'e. 

IMill,  logging  and  agricultural. 

Mining  and  railway. 

Paint  and  glass. 

Saddlery  and  shoe  findings. 

Sporting  goods. 

Stoves  and  ranges. 

Tents  and  awnings. 

Tools. 

Toys  and  novelties. 

In  the  present  discussion  we  shall  consider  first  the 
general  line  of  shelf  hardware  and  then  treat  in  succession 
the  metals  and  heavy  hardware,  builders'  hardware,  and 
sporting  goods.  Automobile  accessories  and  electrical  sup- 
plies, a  smaller  portion  of  which  products  is  distributed 
through  the  hardware  jobbers  than  in  the  case  of  the  lines 
just  mentioned,  will  be  treated  separately  later.  The  regu- 
lar distributive  chain  in  the  hardware  industry  comprises 
manufacturer,  jobber,  retailer,  and  consumer,  but  it  is 
stated  that  in  the  Central  West  and  on  the  Pacific  Coast  a 
greater  proportion  of  goods  is  sold  by  jobbers  to  manufac- 
turing and  other  consumers  not  individuals  than  in  the 
other  sections. 

Shelf  Hardware — Manufacturers*  Terms. — Acti\nties  of 
the  National  Hardware  Association  with  respect  to  terms 
of  sale  have  dealt  both  with  the  purchases  and  with  the 


THE  METAL  INDUSTRIES  2IT 

sales  of  hardware  jobbers.  Although  in  the  90 's  the  Amer- 
ican Hardware  Manufacturers'  Association  gave  much 
consideration  to  net  30-day  terms,  and  some  manufacturers 
adopted  them,  the  strenuous  objection  on  the  part  of  the 
wholesalers  resulted  in  the  abandonment  of  the  attempt  to 
establish  these  terms,  and  the  recognized  terms  upon  which 
manufacturers  sold  continued  for  many  years  to  be  2 
per  cent  10  days,  net  60  days.  The  officers  of  the  jobbers' 
association  have  always  displayed  great  interest  in  the 
maintenance  of  the  discount,  and  have  at  once  communi- 
cated with  manufacturers  who  have  announced  a  decrease 
in  or  discontinuance  of  the  same.  The  reasons  for  the  job- 
ber's advocacy  of  the  cash  discount,  and  the  advantages 
claimed  for  it,  are  substantially  similar  to  those  put  for- 
ward by  the  National  Wholesale  Grocers'  Association, 
which  were  given  in  the  preceding  chapter.  It  is  generally 
held  that  the  discount  is  the  source  of  a  considerable  part 
of  the  net  profits  of  the  jobber.  The  success  of  the  vrork 
may  be  judged  from  the  statement  in  the  1910  report  of 
the  secretary-treasurer  that  "almost  all  manufacturers  now 
admit  that  the  usual  and  ordinary  terms  are  2  per  cent  10 
days,  net  60  days. ' '  From  this  time  on  a  period  of  relative 
quiescence  is  noted,  and  the  terms  of  2  per  cent  10  days, 
net  60  days,  became  established  as  the  regular  hardware 
terms.  For  several  years  correspondence  with  manufac- 
turers was  relatively  small  and  the  work  was  confined 
largely  to  representing  to  members  the  undesirability  of 
wrongfully  deducting  the  discount  when  not  paying  within 
the  10-day  discount  period.* 

*Some  evidence  as  to  promptness  with  which  collections  are  made 
by  hardware  manufacturers  is  afforded  by  the  following  data  con- 
tained in  a  paper  advocating  the  use  of  trade  acceptances,  road  by 
Mr.  E.  H.  Treman  at  the  1916  convention  of  the  National  Hardware 
Association,  and  reproduced  on  pages  23-24  of  the  pamphlet  entitled 
"Trade  Acceptances,  What  They  Are  and  How  They  Are  Used," 
prepared  for  the  American  Acceptance  Council  and  published  October 
1,    1919:     "The  reports  show   that   when   the  bills   are    discounted, 


218    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

This  period,  however,  was  not  of  very  long  duration.  A 
rather  widespread  movement  among  manufacturers  became 
manifest  several  years  later,  in  particular  after  the  outbreak 
of  the  war,  to  either  decrease  or  eliminate  the  discount. 
This  may  be  ascribed  both  to  the  increase  which  occurred  in 
the  price  of  the  various  hardware  articles,  which  accom- 
panied the  increase  in  the  cost  of  production,  and  to  the  ex- 
istence of  a  seller 's  market.  Strong  opposition  was  aroused 
among  the  jobbers,  the  more  so  as  their  cost  of  doing  busi- 
ness had  been  steadily  mounting.  At  the  1916  convention  of 
their  association  the  resolution  of  1899,  favoring  a  cash  dis- 
count of  2  per  cent  for  payment  within  10  days,  was  again 
read,  and  a  similar  resolution  was  passed.  Both  in  1916  and 
in  the  succeeding  year  the  question  was  of  prime  impor- 
tance. In  the  latter  year  a  committee  of  the  jobbers  was 
appointed  to  present  the  matter  to  the  manufacturers'  con- 
vention. At  the  same  time  jobbers  were  again  urged  to  re- 
spect the  discount  period.  With  the  passing  of  war  condi- 
tions, the  matter  has  gradually  declined  in  importance,  and 
in  1918  it  was  stated  that  "many  of  the  manufacturers  who 
changed  their  terms  during  the  past  year  reinstated  the  dis- 
count. "  At  no  time,  however,  did  the  majority  of  manufac- 
turers deviate  from  the  regular  terms.  Deviation  occurred 
more  largely  in  lines  where  the  bulk  of  the  merchandise  has 
been  distributed  through  other  than  hardware  channels,  in 
particular  where  the  bulk  of  the  manufacturers'  sales  are 
to  large  industrial  consumers.  A  prominent  illustration  is 
afforded  in  the  case  of  bolts  and  nuts,  as  was  mentioned 
above,  also  by  explosives,  where  terms  were  recently 
changed  to  net  10  days.  Several  reliable  estimates  agree 
that  at  the  present  time  about  80  per  cent  of  hardware 
items  are  sold  by  manufacturers  upon  the  regular  terms. 

instead  of  being  paid  in  10  days,  they  have  averaged  15  days,  and 
for  those  who  take  the  option  of  the  60-day  credit  period,  the  average 
payment  is  in  from  75  to  80  days,  and  10  per  cent  or  more  of 
customers  take  90  days  or  more." 


THE  METAL  INDUSTRIES  219 

Some  manufacturers  grant  net  terms  of  only  30  days 
instead  of  60  days.  This  fact,  however,  makes  little  dif- 
ference to  the  jobber,  for  he  generally  discounts  his 
purchases.  Yet  it  appears  to  be  the  only  change  which 
has  been  generally  adopted  in  any  of  the  distinctly  hard- 
ware lines.  Most  manufacturers  of  seasonal  goods  have 
continued  for  many  years  to  offer  jobbers  a  dating  on  con- 
dition that  they  permit  the  manufacturer  to  ship  the  goods 
at  his  convenience.  This  is  true  of  agricultural  hand  tools, 
where  forks,  hoes,  rakes  and  cultivators  carry  March  1, 
corn  hooks  and  knives  September  1  and  hay  knives  Novem- 
ber 1.  Certain  household  goods  are  known  as  spring  or 
fall  items  (for  example,  water  coolers  and  oil  cook  stoves; 
and  oil  and  wood  heaters  and  stovepipes),  and  carry  March 

1  and  September  1  respectively.  Furnaces,  stoves  and 
ranges  generally  carry  September  1,  although  several  years 
ago  October  1  was  given,  and  a  spring  dating  of  April  1. 

Shelf  Hardware — Jabbers'  Terms. — The  regular  terms 
of  sale  of  hardware  jobbers  have  been  the  same  as  those 
upon  which  their  purchases  are  made,  namely,  2  per  cent 
10  days,  net  60  days,  but  since  1919,  there  has  been  a 
movement  to  reduce  the  net  period  to  30  days.  The  Na- 
tional Hardware  Association  has  considered  the  question 
at  various  times.  Parallel  with  its  work  of  urging  all 
jobbers  to  respect  the  cash  discount  period,  similar  work 
was  undertaken  designed  to  bring  the  matter  to  the  atten- 
tion of  the  retailer.  In  1911,  a  special  committee  on  cash 
discount  was  appointed  with  this  particular  function. 
From  about  1912  on,  emphasis  began  to  be  placed  upon  the 

2  per  cent  as  a  premium  for  prepayment,  rather  than  as 
a  discount  for  cash.  The  expression  (which  dates  back  at 
least  to  1899)  has  been  employed  in  the  subsequent  deal- 
ings with  the  manufacturers.  The  report  of  the  cash 
discount  committee,  in  1912,  stated  that  certain  of  the 
markets  were  badly  demoralized  on  the  question  of  the 


220    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

enforcement  of  the  cash  discount  period.  Mr.  R.  H. 
Trenian  in  the  address  delivered  in  1916,  to  which  refer- 
ence was  made  above,  gives  the  following  data : 

As  to  jobbers  (wholesale  distributors),  the  reports  show  that 
throughout  the  country  generally  from  40  to  50  per  cent  of  buyers 
discount  their  bills  within  15  days  after  purchase,  while  of 
those  who  take  the  60-day  option  from  25  to  30  per  cent  pay 
"promptly,"  or  within  one  month  following  the  60-day  maturity. 
Of  the  remaining  20  per  cent,  only  about  one-half  pay  in  the 
period  between  3  and  4  months  after  purchase  while  the  other 
half  pay  in  from  4  to  6  months,  or  never,  notwithstanding  that 
the  terms  of  sale  agreed  upon  were  for  a  credit  of  only  60  days. 

Variation  was  noted  according  to  locality,  jobbers  on 
the  Pacific  Coast  having  50  per  cent  of  buyers  discount 
their  bills,  20  per  cent  pay  in  75  days,  and  30  per  cent  in 
from  3  to  4  months.  In  the  rural  districts  the  majority  of 
retailers  did  not  discount  their  bills,  and  averaged  90  days 
in  place  of  the  60  days  called  for  by  the  regular  terms.  In 
some  eases  interest-bearing  notes  for  longer  periods  were 
taken  by  wholesalers.  In  connection  with  the  respect  of 
the  discount  period  by  retailers,  attention  was  directed,  in 
1916,  to  the  fact  that  the  order  blank  prepared  by  the 
retailers'  national  association  contained  a  clause  calling  for 
2  per  cent  on  receipt  of  goods. 

The  other  problem  confronting  the  jobber  in  connection 
with  the  cash  discount  has  been  the  question  of  xroxirao 
terms.  A  growing  tendency  in  this  direction  has  been  evi- 
dent, although  there  is  no  uniformity  of  practice  with 
respect  to  the  matter.  In  certain  cases  semi-monthly  set- 
tlement has  been  permitted,  while  in  some  cases  it  has 
been  confined  to  city  sales.  In  other  sections,  however,  for 
example  in  Iowa,  proximo  terms  are  not  favored. 

It  will  be  evident  from  the  data  given  above  that  the 
question  of  the  enforcement  of  the  net  terms  has  been  of 
equal  importance  with  the  enforcement  of  the  cash  discount 


THE  METAL  INDUSTRIES  221 

period.  As  a  practical  means  to  the  former  end,  the  col- 
lection of  interest  on  overdue  accounts  has  often  been 
advocated,  in  particular  by  the  cash  discount  committee  in 
1911  and  1914.  It  should  be  noted  that  in  certain  sections 
at  least  considerable  improvement  in  collections  has  been 
observed  during  the  past  several  years,  likewise  an  increase 
in  the  percentage  of  those  taking  the  cash  discount. 

Some  interest  has  been  manifested  in  the  trade  accept- 
ance during  recent  years,  and  the  National  Hardware 
Association  has  distributed  considerable  literature.  As  is 
the  case  in  some  other  distributive  lines,  however,  no  wide- 
spread adoption  of  the  acceptance  is  found,  although  it 
was  stated  in  1918  that  quite  a  few  houses,  in  particular 
in  the  South,  had  put  into  effect  terms  of  2  per  cent  10  days, 
net  30  days  or  60-day  trade  acceptance,  and  that  "those 
who  had  tried  acceptances  were  very  much  pleased  Avith 
them."  The  matter  had  previously  been  discussed  at  the 
meetings  of  the  Southern  and  Texas  Associations,  which 
adopted  the  terms  mentioned.  The  general  question  of 
length  of  terms  of  sale  has  been  discussed  at  various  con- 
ventions of  the  National  Association.  In  1918  a  resolution 
was  introduced  favoring  luiiform  "terms  of  2  per  cent 
premium  if  cash  is  received  within  10  days,  or  1  per  cent 
if  received  in  30  days,  or  1  per  cent  if  received  before 
the  10th  of  the  month  for  aggregate  invoices  of  previous 
month,  or  net  60-day  trade  acceptance  or  bank  note  for  the 
previous  month's  aggregate,"  and  in  the  discussion  which 
followed  the  suggestion  was  made  that  terms  should  be 
adopted  not  only  by  the  State  Associations,  but  by  the 
National  Association  as  well.  It  is  stated  that,  during  the 
year  1919,  there  was  a  tendency  to  shorten  the  net  terms 
from  60  days  to  30  days. 

To  consider  briefly  now  the  actual  terms  in  use  in  the 
several  sections  of  the  country.  General  employment  of 
other  than  the  regular  terms  is  always  found  in  certain 


222    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

markets.  At  the  present  time  a  2  per  cent  discount  is  reg- 
ularly given,  even  on  items  upon  which  the  manufacturer 
allows  only  a  lesser  discount,  with  the  exception,  of  course, 
of  distinct  lines,  such  as  metals  and  heavy  hardware.  In 
certain  sections  where  the  net  terms  are  60  days,  some 
jobbers  have  adopted  30  days;  for  example,  in  New  York 
State  and  eastern  Pennsylvania.  In  1918,  it  was  stated 
that  terms  in  Texas,  outside  of  the  Dallas  district,  had  been 
reduced  to  30  days.  In  1920,  however,  only  one-third 
of  the  houses  in  the  State,  in  particular  those  stocking 
principally  heayj-  goods,  sold  on  terms  other  than  the 
regular  2  per  cent  10  days,  net  60  days.  There  was  also 
a  general  tendency  to  shorten  terms  in  the  South,  but  it 
was  hindered  by  the  fact  that  the  large  middle  western 
centers,  such  as  Chicago,  St.  Louis,  and  Louisville,  contin- 
ued on  the  60-day  basis.  At  the  present  time  the  majority 
of  the  southern  jobbers  still  use  the  latter  terms,  which 
are  customary  also  in  various  other  large  eastern  and 
middle  western  markets,  such  as  Cleveland,  Pittsburgh, 
Detroit,  Duluth,  Kansas  City,  Omaha,  Sioux  City,  Des 
Moines,  and  Denver,  and  on  the  Pacific  Coast. 

Other  Hardware  Lines. — Distribution  of  iron  and  steel 
products  and  of  hea^y  hardware  is  accomplished  through 
one  of  three  channels.  There  are  exclusive  metal  houses, 
houses  which  deal  in  heavy  hardware  in  addition  to  iron 
and  steel,  and  hardware  jobbers  who  have  one  department 
of  their  business  dealing  in  these  items.  It  has  been  stated 
that  in  the  East  the  metal  business  in  general  is  handled 
apart  from  hardware,  whereas  in  other  sections  it  is  com- 
bined with  hardware  jobbing.  Among  the  items  embraced 
under  the  term  heavy  hardware,  are  bolts  and  nuts,  horse- 
shoes, nails,  hea\y  tools,  such  as  anvils,  vises,  and  hammers, 
etc.  The  more  staple  have  long  been  known  as  relatively 
unprofitable  items,  the  margin  of  profit  being  small,  but 
turnover  heavy   (in  the  case  of  nails,  estimated,  in  1911, 


THE  METAL  INDUSTRIES  223 

at  from  15  to  20  times  a  year).  The  terms  on  which  the 
general  class  of  items  is  sold  differ  according  to  the  type 
of  dealer.  Terms  on  the  several  classes  of  rolled-steel 
products  in  large  measure  vary  according  to  the  manufac- 
turer's terms.  There  has  been  a  tendency  for  jobbers 
handling  hardware,  however,  to  extend  hardware  terms 
also  on  iron  and  steel.  On  the  other  hand,  with  the 
tendency  of  manufacturers  during  the  past  several  years 
to  decrease  the  discount  allowed,  hardware  jobbers,  a  con- 
siderable proportion  of  whose  business  is  in  these  lines, 
have  shown  a  tendency  to  decrease  the  discount  or  to 
shorten  terms  on  them,  while  continuing  the  regular  terms 
on  the  regular  hardware  items.  Thus  in  the  South  net 
terms  in  a  considerable  number  of  eases  are  30  days,  with 
either  a  1  or  2  per  cent  discount  for  payment  within  10 
days.  Houses  which  do  only  a  small  amount  of  such  busi- 
ness, however,  continue  the  regular  hardware  terms  on  these 
lines. 

Builders'  hardware  is  generally  considered  a  separate 
line.  Owing  to  the  technical  knowledge  required  to  prop- 
erly handle  the  somewhat  intricate  details  of  the  business 
all  hardware  dealers  do  not  handle  it,  and  a  special  depart- 
ment is  created  by  the  wholesaler,  which  sells  to  retailers, 
contractors,  and  consumers.  In  the  past,  manufacturers' 
terms  were  largely  2  per  cent  10  days,  net  60  days,  but 
there  has  been  a  tendency  lately  toward  reduction  of  the 
net  terms  to  30  daj's.  Builders'  hardware  in  some  degree 
is  seasonable,  in  that  consumers  make  larger  purchases  in 
the  spring  and  fall,  but  datings  are  rare.  Jobbers  usually 
sell  the  item  on  tlie  general  hardware  terms  prevalent  in 
the  territory.  In  New  York  City  and  vicinity,  builders' 
hardware  is  sold  by  the  manufacturers,  most  of  whom  have 
branch  offices,  direct  to  the  contractor  or  consumer.  In 
exceptional  cases,  this  may  also  apply  when  New  York 
contractors  erect  large   structures   elsewhere.     It   is  the 


224    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

custom  to  require  payment  of  85  per  cent  of  each  month's 
deliveries  by  the  10th  of  the  following  month  and  the  re- 
maining 15  per  cent  in  30  days  after  the  completion  of  the 
building  operation. 

Sporting  goods  are  being  handled  to  an  increasing  extent 
through  the  hardware  jobbers.  Years  ago  there  were  a 
considerable  number  of  special  jobbers  confining  their 
activities  to  the  line,  but  at  the  present  time  there  are 
stated  to  be  less  than  half  a  dozen  such  houses  in  existence. 
While  in  general  such  goods  are  distributed  through  the 
jobber,  some  manufacturers  sell  direct  to  large  department 
stores  and  others  through  their  own  branch  stores,  and 
direct  to  the  retailer.  The  general  terms,  given  both  by 
manufacturers  and  by  jobbers,  are  the  same  as  in  the  case 
of  hardware,  namely,  2  per  cent  10  days,  net  60  days. 
During  the  war  there  was  a  tendency  for  the  manufacturers 
of  certain  lines,  such  as  firearms  and  ammunition,  to  de- 
crease the  net  period  to  30  days  In  some  cases  proximo 
terms  are  given  by  jobbers,  though  this  is  not  general.  The 
business  is  distinctly  seasonal.  In  this  connection  there 
are  several  general  branches,  each  receiving  a  distinctive 
dating  from  some  manufacturers  as  well  as  jobbers.  These 
dates  are  April  1  on  fishing  tackle,  baseball  and  general 
athletic  goods,  and  October  1  on  firearms  and  ammunition. 

Mill  Supplies  and  "Machinery."^ — Due  to  unity 
of  dealers '  interest,  these  two  classes  of  goods  are  generally 
considered  together.  The  title  is  not,  however,  strictly 
accurate,  inasmuch  as  the  term  "machinery"  refers  in  this 
connection  rather  to  machine  tools,  that  is,  machines  for 
doing  work  with  cutting  tools  or  utilizing  minor  tools  in 
fashioning  the  wood  and  iron  parts  of  machinery,  perform- 
ing the  five  operations  of  planing,  boring,  turning,  milling, 
and  slotting. 

■^Acknowledgment  is  due  Mr.  H.  W.  Strong:,  Secretary,  Strong, 
Carlisle  and  Hammond  Co.,  Cleveland,  for  reading  this  section. 


THE  METAL  INDUSTRIES  225 

Mill  supplies,  exclusive  of  the  metal  lines,  on  the  whole 
carry  a  cash  discount  of  2  per  cent  when  sold  by  manufac- 
turers, with  net  terms  of  30  or  60  days.  Many  exceptions 
are  however  found,  and  several  dealers  report  that  during 
the  last  few  years  quite  a  few  manufacturers  eliminated 
the  discount  or  reduced  it  to  1  per  cent. 

Machine  tools,  on  the  other  hand,  are  sold  by  many  of 
the  large  manufacturers  on  terms  of  net  30  days.  Several 
authorities  state  that  discounts  given  are  largely  by  the 
newer  and  smaller  manufacturers,  possessing  less  financial 
strength  and  therefore  less  desirous  of  having  capital  tied 
up  in  receivables,  but  who  after  several  years  discontinue 
the  same.  Quite  a  number  of  well-established  manufac- 
turers, however,  allow  a  cash  discount  of  1  per  cent,  and  in 
some  cases  2  per  cent  is  given.  In  certain  cases  the  former 
discount  is  given  on  lighter  tools,  the  heavier  carrying  no 
discount.  It  is  estimated  that  of  the  standard  line  of 
machine  tools  possibly  80  to  85  per  cent  is  sold  through 
dealers  and  the  balance  by  manufacturers.  Direct  sales 
occur  more  largely  in  the  case  of  new  tools  or  devices,  the 
manufacturer  introducing  the  same,  and  then  getting  the 
dealers  to  stock  the  item.  An  increasing  tendency  toward 
the  distribution  of  both  mill  supplies  and  tools  through 
dealers  is  noted. 

There  is  an  increasing  tendency  for  dealers  to  handle 
both  classes  of  goods.  Perhaps  75  per  cent  of  distributors 
start  with  mill  supplies  only,  later  adding  lines  of  machine 
tools,  one  at  a  time.  Ninety  per  cent  of  mill-supply  houses 
in  the  South  also  handle  machinery.  In  general,  mill  sup- 
plies and  machinery  alone  are  handled,  but  in  the  West 
and  in  the  less-developed  sections,  other  lines,  such  as 
agricultural  machinery,  are  also  handled  to  a  greater  or 
lesser  extent.  In  some  cases  the  mill-supply  business  is 
combined  with  hardware  jobbing.  Separate  departments 
usually  handle  mill  supplies  and  machinery.    In  the  ban- 


226    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

dling  of  the  latter,  mechanical  knowledge  is  required,  and 
there  are  therefore  separate  purchasing  agents  for  both 
classes,  although  90  per  cent  of  the  houses  buying  ma- 
chinery also  buy  supplies. 

In  general,  the  terms  of  dealers  conform  to  those  upon 
which  they  are  sold  by  manufacturers.  Machine  tools  thus 
generally  bear  terms  of  net  30  days,  in  certain  cases  with 
cash  discounts  of  1  or  2  per  cent  for  payment  within  10 
days.  Mill  supplies  generally  carry  terms  of  2  per  cent  10 
days,  net  30  days  or  60  days,  although  on  certain  items, 
mostly  the  metal  lines,  and  items  such  as  bolts,  nuts,  rivets, 
and  some  kinds  of  screws,  the  discount  is  only  1  per  cent, 
and  on  some  other  items,  such  as  iron  and  steel  bars,  no 
discount  is  given  in  certain  cases.  Proximo  terms  are  used 
at  times,  likewise  the  trade  acceptance.  In  the  South,  how- 
ever, dealers'  terms  are  generally  2  per  cent  10  days,  net  30 
days  or  60  days,  on  sales  of  both  supplies  and  machinery, 
these  terms  applying  to  approximately  90  per  cent  of  the 
dealers'  total  sales.  The  difference  in  terms  between  ma- 
chine tools  and  mill  supplies  has  been  accounted  for  by 
differences  in  financial  strength  between  the  manufacturers 
of  the  two  classes  of  goods,  and  also  by  the  fact  that  many 
of  the  great  variety  of  dealers'  customers  are  small  and 
with  uncertain  credit  ratings.  On  the  larger  items,  such 
as  machine  tools,  dealers  frequently  cover  their  sales  with 
some  form  of  chattel  mortgage  or  method  whereby  title 
is  retained.  In  such  cases  an  initial  cash  payment,  such 
as  1/3  or  1/2,  may  be  required  with  order  or  upon  receipt 
of  bill  of  lading,  and  the  balance  covered  by  interest-bearing 
notes  maturing  monthly  for  3  or  4  months.  In  some  cases 
6  months'  time  is  given. 

Collections  of  dealers  as  indicated  by  the  average  num- 
ber of  days'  business  represented  by  accounts  receivable 
have  always  been  considerably  longer  than  the  net  period 
for  which  terms  are  nominally  made.    The  average  is  esti- 


THE  METAL  INDUSTRIES  227 

mated  at  somewhere  between  45  and  60  days,  but  closer  to 
the  second  figure.  The  percentage  of  dealers'  customers 
who  discount  their  purchases  is  relatively  small.  While  the 
figure,  of  course,  will  vary  with  the  character  of  business 
of  the  house,  information  received  from  several  houses 
indicates  that  slightly  over  1/3  discount,  approximately 
1/3  pay  when  due,  and  the  remainder  run  past  due.  Deal- 
ers have  tended  to  shorten  the  net  terms  actually  taken  by 
insisting  upon  stricter  observance  of  the  nominal  terms, 
and  certain  houses  have  shown  a  considerable  decrease  in 
the  number  of  days'  business  outstanding.  It  is  interest- 
ing to  observe  that  while  **  there  have  been  a  good  many 
suggestions  from  dealers  to  manufacturers  looking  toward 
the  reintroduction  of  the  cash  discount  in  the  machine-tool 
trade,"  there  has  been  no  active  effort  comparable  to  that 
put  forth  bj'  jobbers  in  other  lines,  such  as  hardware.  It 
has  been  suggested  that  this  is  due  to  the  fact  that  dealers 
in  general  work  very  closely  with  their  principals,  the 
manufacturers.  It  may  be  observed  that  dealers  as  a  rule 
sell  machine  tools  from  samples  carried  in  warehouse,  while 
mill  supplies  are  stocked  by  them. 

Machinery.'' — Power  machinery,  including  engines  and 
boilers,  and  hoisting  and  conveying  machinerj^  have  as  regu- 
lar terms  net  30  days.  However,  exception  is  made  to  such 
terms  in  two  cases — where  the  machinery  is  to  be  erected 
or  where  the  amount  of  the  order  is  large.  In  some  cases 
payment  of  from  50  to  80  per  cent  of  the  total  amount  is 
specified  upon  shipment  of  the  material.  Subsequent  pay- 
ments are  only  1,  2,  or  3  in  number,  and  a  time  limit,  such 
as  3  or  4  months,  is  fixed  within  which  final  payment  shall 
be  made.  Thus,  for  example,  it  may  be  specified  that  60 
per  cent  is  due  upon  shipment,  20  per  cent  in  30  days 
thereafter,  and  20  per  cent  when  the  material  has  been 

'Acknowledgment  is  due  Mr.  H.  W.  Strong,  Secretary,  Strong 
Carlisle  and  Hammond  Co.,  Cleveland,  for  reading  this  section. 


228    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

erected.  In  other  cases  an  initial  payment  upon  siting 
of  the  order  may  be  specified,  though  sometimes  omitted, 
then  monthly  payments,  as  the  work  progresses,  for  70 
per  cent  or  more  of  the  value  of  goods  shipped  and  labor 
performed  during  a  month,  and  a  final  payment  of  10  per 
cent  or  more  upon  the  erection  of  the  machinery.  In  some 
cases  the  payments  are  required  for  the  work  done  in  the 
shop  and  the  final  payment  is  due  upon  the  shipment  of 
the  macliinery.  Certain  manufacturers  vary  the  payment 
plan  according  to  the  size  of  the  order.  Thus,  for  orders 
under  $5,000,  not  calling  for  erection,  terms  of  net  30  days 
may  be  specified ;  for  orders  of  from  $5,000  to  $20,000  not 
calling  for  erection,  and  orders  up  to  $20,000  calling  for 
erection,  payment  upon  shipment  may  be  required,  with 
balance  due  in  30  days  and  upon  erection;  while  for  con- 
tracts of  over  $20,000,  whether  calling  for  erection  or  not, 
progressive  monthly  payments  may  be  required,  with  the 
balance  due  upon  completion  of  the  work. 

Textile  machinery  is  almost  entirely  sold  direct  by  the 
manufacturer  to  the  user.  The  regular  terms  on  the  do- 
mestic product  are  net  30  days  from  date  of  invoice.  A 
very  small  proportion  of  sales  are  made  upon  terms  of  net 
60  days,  and  very  infrequently  a  cash  discount  of  2  per 
cent  is  given  for  payment  within  10  days.  A  study  made 
in  1916  indicates  that  in  some  cases  cotton-mill  stock  and 
bonds  were  accepted.  Silk  machinery,  however,  is  sold 
to  some  extent  on  a  time  basis,  estimates  placing  the  total 
so  sold  at  approximately  1/4  to  1/3  of  the  output.  Pro- 
vision is  made  in  such  cases  for  the  payment  of  from  1/3  to 
1/2  cash  on  delivery,  and  the  balance  is  covered  by  notes 
due  in  3,  6,  9,  or  12  months.  These  notes  are  secured  by 
a  lease  contract.  Material  use  is  made  of  the  plan  by  new 
concerns  which  are  usually  short  of  capital,  also  in  some 
cases  for  financially  weak  purchasers  of  other  classes  of 
textile  machinery. 


THE  METAL  INDUSTRIES  229 

Printing  machinery  is  also  sold  direct  by  the  manufac- 
turer to  the  user.  Either  cash  or  deferred  payment  is 
specified.  In  the  latter  ease  an  initial  cash  payment  of  about 
1/4  the  amount  is  required,  and  the  balance  due  within 
24  months,  being  represented  by  interest-bearing  notes 
maturing  monthly  and  secured  by  a  lien  on  the  machinery. 
In  some  eases  a  discount  of  5  per  cent  is  given  for  cash 
settlement  on  erection  of  the  machinery. 

Railway  Equipment. — The  regular  terms  on  which  do- 
mestic sales  of  locomotives  are  made  are  net  30  days  from 
date  of  delivery.'^  A  leading  manufacturer  states  that  it  is 
in  most  cases  f.  o.  b.  works,  and  that  it  refers  only  occa- 
sionally to  time  from  acceptance  when  dealing  with 
political  subdivisions  where  the  statutes  specifically  require 
formal  acceptance  prior  to  payment  for  the  goods.  Where 
the  purchaser  has  insufficient  funds,  conditional  sales  or 
lease  agreements  are  made.  Security  is  afforded  by  a  lien 
on  the  equipment.  Such  sales  occur  in  particular  to  con- 
tractors or  very  small  railroads,  and  in  normal  times  only 
a  very  small  percentage  of  the  business  is  done  on  such 
terms.  While  the  terms  of  payment  vary  greatly,  provision 
is  generally  made  for  an  initial  payment  ranging  from  20 
to  33  1/3  per  cent.  Payment  of  the  balance  in  equal  monthly 
or  quarterly  installments  is  specified,  the  total  period  in 
general  running  not  over  2  or  3  years,  although  in  some 
eases  up  to  5  years.  The  payments  are  evidenced  by  notes 
drawing  interest  at  6  per  cent.  No  general  changes  in 
terms  during  the  past  decade  are  noted,  other  than  a  more 
frequent  formation  of  equipment  trusts.  In  such  cases 
either  the  regular  terms  prevail  or  cash  upon  completion 
or  acceptance  by  the  railroad  is  specified. 

Usual  terms  in  car-builder's  contracts,  covering  all 
classes  of  freight  and  passenger  cars,  call  for  cash  on  de- 

^  Acknowledgment  is  due  Mr.  J.  Oakley  Hobby,  Jr.,  Treasurer, 
American  Locomotive  Co.,  for  reading  this  material. 


230    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

livery,  that  is,  for  invoices  accompanied  by  inspector's 
certificate  or  receipt,  or  bill  of  lading  of  railroad  first 
handling  the  cars,  in  lots  of  25,  50,  or  100  cars,*  These 
terms  prevail  also  in  cases  where  equipment  trusts  are  em- 
ployed, as  has  been  done  in  recent  years  by  many  of  the 
larger  railroads.  Occasional  payment  out  of  current  funds 
by  a  few  railroads  with  substantial  credit  is  noted,  in  which 
case  net  30  days  from  delivery  has  been  specified.  In  a  few 
cases  short-time  notes  with  interest  have  been  taken  where 
the  amount  involved  was  not  very  large.  While  each  case 
is  treated  individually,  as  a  general  rule  a  cash  payment 
of  approximately  25  per  cent  is  required  with  the  order, 
and  the  balance  is  represented  by  notes,  part  of  which  are 
due  upon  the  delivery  of  the  cars,  and  the  remainder  spread 
evenly  over  about  one  year.  The  cars  remain  the  property 
of  the  builder  until  paid  for. 

Terms  in  the  case  of  sales  of  street  railway,  interurban, 
and  subway  cars  are  largely  adapted  to  the  particular  case 
in  question.  While  contracts  specify  cash  on  shipment, 
meaning  sight  draft  attached  to  bill  of  lading,  this  is  not 
rigidly  adhered  to.  Ordinarily,  however,  payment  in  three 
equal  installments,  the  last  due  at  the  close  of  3  to  4  months, 
has  represented  the  maximum  terms.  Deferred  payments 
bear  interest. 

Shipbuilding.^ — Terms  employed  on  ship  construction  for 
private  domestic  purchasers  provide  for  an  initial  pay- 
ment upon  execution  of  the  contract.  This  is  usually  5,  10, 
or  15  per  cent  and  in  rare  cases  20  per  cent  of  the  purchase 
price.  Subsequent  payments  of  equal  size  are  required 
when  certain  steps  in  the  building  of  the  vessel  have  been 
completed,  such  as  laying  the  keel,  plating,  launching,  etc. 

« Acknowledgment  is  due  Mr.  N.  S.  Eeeder,  Vice  President,  Pressed 
Steel  Car  Co.,  for  reading  this  material. 

*  Acknowledgment  is  due  Mr.  J.  P.  Bender,  Credit  Manager,  Beth- 
lehem Steel  Co.,  for  reading  this  section. 


THE  METAL  INDUSTRIES  231 

The  number  of  payments  varies  with  the  type  of  vessel  and 
estimated  time  required  for  completion,  but  is  stated  to 
be  approximately  10  or  12.  The  final  installment,  varying 
from  5  to  10  per  cent,  is  generally  due  upon  completion 
and  delivery  of  the  vessel.  Prior  to  1917,  it  was  the  gen- 
eral practice  in  certain  cases,  such  as  for  large  bulk  cargo 
ships,  to  accept  one-half  the  purchase  price  in  first  serial 
bonds,  maturing  in  from  1  to  10  years. 


CHAPTER  XIII 

THE    AUTOMOTIVE,     AGRICULTURAL     IMPLEMENT,     ELECTRICAL 
AND   FUEL  INDUSTRIES 

The  present  chapter  deals  with  three  principal  groups  of 
products.  It  includes  items  such  as  passenger  cars  and 
trucks,  which  are  destined  to  serve  as  a  kind  of  fixed  capital 
to  the  final  user ;  items  which  are  highly  manufactured  and 
small  in  size,  such  as  automobile  accessories  and  various 
electrical  products,  and  fuel.  Almost  all  these  articles  are 
therefore  partly  for  household,  partly  for  industrial  use. 
The  only  ones  in  whose  distribution  the  jobber  plays  a 
considerable  role  are  automobile  accessories,  electrical  prod- 
ucts and  petroleum. 

While  each  class  of  article  has  its  distinctive  terms,  the 
latter  on  the  whole  are  short,  except  for  those  capital  goods 
where  specific  provision  is  made  to  carry  the  purchaser. 
This  is  notably  the  case  with  agricultural  implements, 
where  net  due  dates  are  adjusted  to  the  farmer's  seasonal 
ability  to  pay.  On  both  this  item  and  automobiles,  there 
is  a  tendency,  where  credit  is  granted,  to  use  notes  or  ac- 
ceptances, instead  of  having  the  amount  run  on  open 
account.  Rubber  goods,  automobile  accessories  and  elec- 
trical products  carry  terms  of  either  30  days  or  60  days, 
certain  items  in  the  first  named  group  also  having  a  season 
dating.  Discounts  are  generally  1  or  2  per  cent,  Avith  the 
exception  of  automobile  tires  and  tubes,  for  which  terms 
are  regularly  5  per  cent  10th  proximo,  and  of  certain  elec- 
trical products.  Fuel  is  generally  destined  for  current  use, 
so  that  coal  and  coke  carry  net  30-day  or  proximo  terms, 

232 


THE  AUTOMOTIVE  INDUSTRIES  233 

and  petroleum  products  on  the  whole  carry  net  terms  of  30 
days,  with  corresponding  discounts  in  some  cases. 

Automabiles.^ — Passenger  automobiles  and  trucks  are  or- 
dinarily distributed  by  manufacturers  through  branch 
houses  or  distributors,  who  control  a  specified  territory. 
The  latter  make  arrangements  with  dealers  in  their  terri- 
tory, but  may  also  retail  cars  locally. 

The  manufacturer  receives  cash  payment,  usually 
through  use  of  a  sight  draft  with  bill  of  lading  attached 
in  the  case  of  shipments,  or  payment  before  the  car  is 
driven  away.  In  many  cases  the  practice  is  to  draw  upon 
the  distributor,  who  in  turn  draws  upon  the  dealer,  but 
in  the  case  of  financially  strong  dealers  the  manufacturer 
draws  direct  upon  the  latter.  A  cash  deposit  is  often  re- 
quired, either  repayable  at  the  expiration  of  the  contract 
between  manufacturer  and  distributor  or  applicable  in 
specified  amounts  toward  the  purchase  price  of  each  car 
or  truck.  While  sometimes  a  flat  amount  is  stipulated,  this 
is  generally  calculated  roughly  at  so  much  per  car  con- 
tracted for,  but  the  amounts  required  by  different  manu- 
facturers vary  greatly.  There  is  now  quite  a  movement  on 
foot  to  eliminate  cash  deposits,  and  this  has  been  carried 
out  by  some  leading  manufacturers. 

In  order  to  assist  distributors  and  dealers  in  purchasing 
their  passenger  cars  during  the  winter  months,  several 
plans  have  been  devised  by  some  of  the  larger  manufac- 
turers in  connection  with  carload  shipments.  A  cash  pay- 
ment per  car  is  required,  also  certain  additional  payments 
for  miscellaneous  expenses.  To  the  draft  and  bill  of 
lading  is  attached  a  separate  trust  receipt  and  note  for  each 
ear.  The  draft  is  drawn  on  the  dealer  direct  in  case  of 
direct  shipment  to  him.  Notes  are  interest  bearing  and 
mature  in  from  5  to  3  months,  a  graded  scale  according  to 

*  Acknowledgment  is  due  Mr.  A.  L,  Deane,  Vice  President,  General 
Motors   Acceptance   Corporation,   for   reading   this   section. 


234    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

date  of  shipment  being  arranged,  the  earlier  shipments 
carrying  more  time.  Maturities  range  from  April  to  June. 
Payment  is  required  before  the  machine  is  disposed  of. 
This  plan  calls  for  placing  the  car  on  the  distributor's  or 
dealer's  floor.  Instead,  it  may  be  placed  in  warehouse,  in 
which  event  no  trust  receipt  is  used,  but  instead,  a  ware- 
house receipt  is  attached  to  the  note  representing  the 
machine  in  question.  The  great  majority  of  manufacturers, 
however,  extend  no  assistance  to  the  distributor  and  dealer, 
but  leave  the  latter  to  obtain  accommodation  from  his  bank 
or  from  one  of  the  finance  companies  which  have  specialized 
in  this  field.  Some  distributors  have  devised  more  or  less 
similar  plans  for  financing  dealers,  both  in  connection  with 
sales  of  passenger  cars  and  trucks. 

Distributors  and  dealers  in  some  cases  sell  a  considerable 
number  of  passenger  cars  on  time,  the  partial  payment  plan 
being  employed.  While  certain  makers  of  higher  priced 
cars  report  little  use  of  such  terms  in  connection  with  their 
product,  some  makers  of  popular-priced  cars  estimate  that 
over  half  their  product  is  sold  on  time.  The  size  of  the 
initial  cash  payment  to  the  distributor  or  dealer  differs, 
being  stated  variously  as  generally  25,  33  1/3,  and  50  per 
cent.  The  balance  is  paid  in  monthly  installments,  the 
maximum  time  limit  being  given  as  7  to  12  months. 
Security  is  afforded  by  the  use  of  chattel  mortgage,  condi- 
tional sale,  or  lease  agreement.  In  one-crop  agricultural 
sections,  such  as  the  Northwest  and  South,  it  is  stated  that 
the  farmer's  note  is  at  times  taken  for  the  entire  purchase 
price  of  the  car,  being  made  payable  at  the  time  of  market- 
ing the  crop. 

While  cash  payment  to  the  manufacturer  is  practically 
universal  in  the  case  of  passenger  cars,  a  certain  proportion 
of  trucks  are  sold  on  time  by  manufacturers.  A  consider- 
able number,  however,  require  cash  payment.  When  sales 
are  made  on  time  an  initial  cash  payment  of  25  to  33  1/3 


THE  AUTOMOTIVE  INDUSTRIES  235 

per  cent  is  generally  specified,  the  balance  usually  being 
payable  in  12  equal  monthly  payments,  although  the  num- 
ber reported  runs  from  4  to  18.  Security  is  afforded  by  the 
use  of  chattel  mortgage,  conditional  sale,  or  lease  agree- 
ment. In  practical  operation,  plans  such  as  these  will  ap- 
proximate those  indicated  in  connection  with  winter  pur- 
chases of  passenger  cars,  the  manufacturer  drawing  on  the 
purchaser,  releasing  the  truck  under  trust  receipt  (inas- 
much as  it  is  placed  on  the  floor,  and  not  in  warehouse), 
and  receiving  the  series  of  notes,  in  place  of  the  one  note. 
Trade  acceptances  are  used  in  certain  cases  in  place  of 
notes. 

Trucks  are  more  largely  sold  on  time  by  distributors  and 
dealers  than  are  passenger  cars.  Estimates  in  general  agree 
that  70  per  cent  is  so  sold.  The  initial  cash  payment  to  the 
distributor  or  dealer  is  usually  25  or  sometimes  33  1/3  per 
cent,  and  the  balance  is  generally  divided  into  12  equal 
monthly  payments.  The  period,  however,  may  vary  from 
90  days  to  18  months.  Interest-bearing  notes  are  used. 
Security  is  afforded  by  the  same  3  devices  indicated  above 
in  connection  with  passenger  cars.  It  is  stated  that  there 
is  a  larger  proportion  of  cash  sales  in  the  East  than  in  the 
Middle  West  or  on  the  Pacific  Coast,  and  that  the  duration 
of  notes  covering  a  sale  in  general  will  be  for  a  longer 
period  in  the  latter  two  territories. 

One  of  the  leading  automobile  manufacturers  has  created 
a  special  banking  corporation  to  assist  in  financing  its  dis- 
tributors and  dealers.  Three  plans  have  been  devised,  two 
in  connection  with  wholesale  and  one  in  connection  with 
retail  sales.  The  plans  are  substantially  similar  to  those 
indicated  above,  with  the  exception  that  the  banking  cor- 
poration finances  the  sales,  instead  of  leaving  the  purchaser 
and  seller  to  make  their  own  arrangements.  In  the  case  of 
sales  by  producing  companies  direct  to  distributors  and 
dealers,  notes  are  given  by  the  latter  to  the  corporation, 


236   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

maturing  in  not  over  6  montb.s  in  the  case  of  both  passenger 
cars  and  trucks.  The  time  varies  according  to  the  season 
and  the  territory.  Where  a  trust  receipt,  covering  the  cars 
in  question,  is  used,  and  cars  are  stored  on  the  dealer's 
floor,  a  cash  payment  of  at  least  15  per  cent  is  required; 
in  the  case  of  the  warehouse  plan,  at  least  10  per  cent,  a 
sight  draft  being  drawn  for  this  amount.  "Drive-away" 
shipments,  to  be  stored  on  the  dealer's  floor,  likewise  re- 
quire 15  per  e«nt. 

In  the  case  of  sales  by  distributor  or  dealer  to  subdealer, 
a  trade  acceptance  is  used,  the  distributor  drawing  on  the 
subdealer  and  indorsing  the  acceptance  to  tlie  order  of  the 
corporation,  which  pays  the  distributor  or  direct  dealer  its 
face  value  in  cash.  Maturity,  margins,  and  other  details 
are  the  same,  the  option  being  given  of  either  floor  or  ware- 
house storage  or  drive-away  shipments.  The  extent  of  use 
of  the  wholesale  plans  depends  upon  the  season  of  the 
year. 

The  retail  plan  is  more  largely  used  in  summer,  when 
the  dealer  does  not  find  it  necessary  to  place  cars  in  storage. 
In  the  case  of  retail  sales,  the  purchaser  gives  the  dealer  a 
non-interest-bearing  note  for  the  amount  being  financed, 
which  calls  for  regular  monthly  payments,  the  time  not 
exceeding  12  months  in  the  case  of  passenger  cars  or 
trucks.  The  minimum  initial  payment  is  30  per  cent,  and 
seciirity  is  afforded  in  the  usual  manner,  by  chattel  mort- 
gage, conditional  sale,  or  lease  agreement,  according  to  the 
law  of  the  particular  state  in  which  the  sale  is  made.  The 
dealer  indorses  this  note,  ordering  payment  to  be  made  to 
the  corporation  and  the  corporation  then  buys  the  note 
provided  the  credit  of  the  purchaser  upon  independent  in- 
vestigation proves  satisfactory,  paying  the  dealer  face  value 
for  it  in  cash.  The  details  of  the  plan  vary  according  to 
the  individual  case.  The  size  of  the  initial  payment  de- 
pends both  upon  the  number  of  payments  specified  and 


THE  AUTOMOTIVE  INDUSTRIES  237 

their  frequency.  Depreciation  on  the  car  is  estimated  and 
the  user 's  equity  considered.  In  case  only  several  payments 
are  made,  at  intervals  of  several  months,  the  initial  amount 
would  be  larger  than  if  monthly  payments  were  specified. 
Farmers  alone  are  permitted  to  make  an  initial  payment  of 
at  least  40  per  cent,  with  payment  of  one-half  the  remainder 
at  the  close  of  4  months,  and  the  final  payment  at  the  close 
of  8  months,  or  with  the  deferred  balance  payable  in  three 
equal  installments  at  intervals  of  three  months.  An  alter- 
nate plan  is  also  provided  whereby  the  farmer  may  make 
instead  an  initial  payment  of  at  least  50  per  cent  and  pay 
the  balance  in  one  payment  within  7  months.  The  cor- 
poration resells  directly  to  banks  and  investors'  notes  and 
acceptances  arising  from  transactions  under  either  of  the 
wholesale  plans,  and  collateral  gold  notes  are  issued  against 
obligations  arising  from  sales  under  the  retail  plan,  and  at 
times  against  notes  and  acceptances. 

Repair  parts  are  generally  sold  by  manufacturers  on 
monthly  settlement,  due  dates  ranging  from  the  10th  to 
the  20th,  and  no  cash  discount  is  allowed.  In  certain  cases 
net  30  days  is  given,  while  cash  on  delivery  is  also  specified 
in  some  instances. 

Rubber  Goods.^ — Among  the  various  classes  of  rubber 
goods,  automobile  tires  and  tubes  are  by  far  the  most 
important.  The  larger  manufacturers  have  branch  houses 
located  in  important  centers.  It  is  estimated  that  two- 
thirds  to  three-fourths  the  output  is  sold  direct  to  dealers, 
instead  of  through  jobbers.  Under  the  latter  head  are 
included,  in  addition  to  special  automobile  accessory  and 
hardware  jobbers,  also  mercantile  houses,  wholesale  grocers, 
farm  implement  wholesalers,  etc.  The  larger  retailers 
(located  usually  in  the  larger  cities)  also  sell  to  some  extent 
to  small  dealers  in  neighboring  towns.     Retailers  or  dealers 

^Acknowledgment  is  due  Mr.  S.  G.  Carkhuff,  Secretary,  Firestone 
Tire  and  Eubber  Co.,  for  reading  this  section. 


238   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

may  be  either  specialized  or  handle  also  other  lines,  such  as 
hardware,  or  conduct  garages  or  vulcanizing  shops. 

The  regular  manufacturers'  terms  on  tires  are  5  per  cent 
10th  proximo.  In  certain  cases  net  terms  are  30  days, 
although  frequently  no  net  terms  are  specified.  On  Pacific 
Coast  shipments  some  manufacturers  give  5  per  cent  10th 
proximo  of  the  second  month  on  direct  shipments  to  the 
dealer,  which  terms  also  obtain  in  some  cases  in  other  terri- 
tories where  the  distance  to  the  branch  or  distributing 
point  is  great.  Estimates  of  leading  companies  agree  that 
from  75  to  85  per  cent  of  the  accounts  are  paid  by  the  10th 
proximo,  though  this  figure,  of  course,  varies  with  the 
several  manufacturers.  In  general,  no  marked  difference  is 
reported  in  promptness  with  which  collections  are  made 
from  the  different  types  of  purchaser,  although  several 
manufacturers  refer  to  the  small  garage  dealer  either  as 
slowest  pay  or  as  presenting  the  greatest  credit  risk.  It 
may  be  stated  in  this  connection  that  the  larger  manufac- 
turers have  an  elaborate  system  of  reports  from  branches 
to  show  the  status  of  collections,  including  in  one  manner 
or  another  the  proportion  of  accounts  not  discounted,  those 
1  month  and  2  months  old,  etc. 

In  recent  years  a  dating  for  tires  shipped  during  the 
winter  months,  namely,  from  November  1,  December  1,  or 
January  1  to  March  1  or  April  1,  or  in  one  case  from  Sep- 
tember 1  to  January  1,  has  been  introduced.  This  varies 
somewhat  with  the  individual  manufacturer,  and  the  same 
manufacturer  may  vary  his  terms  from  year  to  year,  both 
as  to  period  of  shipping  and  dates  of  payment.  April  1 
(and  thus  due  date  of  May  10)  is  most  common,  although 
due  date  of  April  10  is  sometimes  specified.  The  three- 
payment  plan  is  used  in  certain  cases,  1/3  of  February  ship- 
ments, for  example,  being  due  March  10,  1/3  April  10,  and 
1/3  May  10,  and  at  times  the  due  dates  for  shipments  dur- 
ing these  months  are  April  10,  May  10,  and  June  10  or  May 


THE  AUTOMOTIVE  INDUSTRIES  239 

10,  June  10,  and  July  10.  Some  manufacturers  permit  the 
buyer  at  his  option  to  pay  on  either  single  or  three-payment 
plan.  Anticipation  is  permitted,  in  certain  cases  at  the 
rate  of  1  per  cent  per  month,  in  others  at  the  rate  of  6  or 
8  per  cent  per  annum.  An  increasing  use  of  the  trade 
acceptance  is  indicated,  in  particular,  in  connection  with 
shipments  bearing  the  spring  due  date.  Bicycle  tires,  dur- 
ing the  winter  months,  carry  a  dating  somewhat  similar  to 
automobile  tires.  While  certain  manufacturers  note  a  tend- 
ency to  shorten  terms,  or  rather  to  make  prompter  collec- 
tions, during  the  past  decade,  others  report  no  change  in 
this  regard. 

Although  a  considerable  number  of  companies  confine 
their  activities  entirely  to  tlie  manufacture  of  tires,  others 
make  to  a  greater  or  lesser  extent  the  various  other  classes 
of  rubber  goods.  It  is  stated  to  be  the  tendency  for  the 
larger  companies  to  enlarge  their  products  beyond  tires 
and  tubes,  although  some  companies  have  commenced  with 
other  lines.  The  large  companies  manufacture  practically 
all  lines.  Certain  of  these  products,  such  as  druggists' 
sundries  and  mechanical  goods,  are  distributed  largely 
through  jobbers.  On  the  other  hand,  rubber  footwear  is 
sold  in  large  part  direct  to  retailers. 

Mechanical  goods  as  a  whole  are  largely  sold  on  terms  of 
2  per  cent  10  days,  net  30  days  or  net  60  days.  Occasionally 
large  accounts  receive  2  per  cent  second  10th  proximo,  with 
no  net  terms.  Jobbers  of  thresher  belts  in  some  cases  re- 
ceive a  dating,  May  shipments  bearing  a  2  per  cent  discount 
if  paid  November  10,  while  shipments  of  garden  hose  from 
about  November  1  to  April  1,  bear  a  spring  dating  of  May  1 
or  in  some  cases  April  1.  Fire  hose,  which  is  sold  largely 
to  municipalities,  bears  terms  of  net  4  months,  or  net  12 
months,  interest  being  added  at  the  rate  of  6  per  cent  per 
annum  in  the  latter  case  for  the  additional  time  taken. 
Insulated  wire  is  sold  on  terms  of  1  per  cent  10  days,  net 


240   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

30  days.  Druggists'  sundries  bear  terms  of  2  per  cent  10 
days,  net  60  days,  no  special  dating  being  given.  Rubber 
footwear  datings  differ.  April  1  to  November  1  shipments 
are  due  December  15  net.  November  and  December  "fill- 
in"  shipments  in  one  case  carry  about  30  days,  and  in 
one  case  January  1  to  April  1  shipments  are  due  net  May  1. 
Shipments  of  tennis  shoes,  etc.,  from  January  1  to  May  31 
are  due  net  July  1,  and  shipments  during  all  other  months 
are  due  net  on  the  15th  of  the  second  month  following. 
Soles  and  heels  carry  terms  of  2  per  cent  10th  proximo,  or 
5  per  cent  10th  proximo.  Rubber  clothing  carries  a  dis- 
count of  2  per  cent.  January  to  March  shipments  are  due 
April  10.  April  and  May  shipments  are  due  May  10  and 
June  10,  respectively,  while  shipments  from  June  to  Sep- 
tember, inclusive,  are  due  October  10  and  shipments  in 
the  three  following  months  have  due  dates  of  November  10, 
December  10,  and  January  10,  respectively.  All  datings 
are  subject  to  anticipation,  although  the  rate  may  vary 
according  to  the  product  in  question.  On  all  these  prod- 
ucts, proximo  terms  are  employed  to  some  extent  in  addition 
to  the  cases  mentioned. 

As  would  be  expected,  the  percentage  of  discounters  on 
mechanical  goods,  druggists'  sundries,  and  insulated  wire 
is  stated  to  be  considerably  less  than  on  tires.  One  manu- 
facturer states  that  buyers  of  mechanical  goods  in  general 
do  not  discount,  as  the  average  purchase  is  small  and  the 
discount  not  large  enough  to  be  an  incentive.  More  than 
half  of  footwear  customers  are  reported  to  anticipate. 

Automobile  Accessories.^ — At  the  present  time  there  is 
little  uniformity  in  marketing  methods,  and  the  latter  are 
in  a  state  of  change,  due  both  to  the  rapid  growth  of  the 
industry,  to  the  variety  of  products  included  under  this 
head,  and  to  the  large  number  of  manufacturers.    A  larger 

'Acknowledgment  is  due  Mr.  J.  C.  Ealston,  Vice  President,  Beck- 
ley-Ralston  Co.,  Chicago,  for  reading  this  section. 


THE  AUTOMOTIVE  INDUSTRIES  241 

proportion  of  sales  are  made  by  manufacturers  direct  to 
retailers  than  is  usual  in  other  lines,  although  the  propor- 
tion varies  greatly  for  the  different  products. 

Terms  of  sale  of  manufacturers  in  general  are  2  per  cent 
10  days,  net  30  days,  to  both  wholesalers  and  retailers. 
Proximo  terms,  usually  the  10th  but  in  some  instances  the 
15th  or  20th,  are  permitted  in  certain  cases  to  the  larger 
purchasers,  such  as  automobile  manufacturers  and  those 
having  a  number  of  shipments  during  the  month.  Some 
manufacturers  allow  or  request  their  customers  to  use  a 
30,  60,  or  even  90-day  trade  acceptance  with  varying  or 
no  discount.  On  lines  other  than  tires,  dating  is  not  a 
general  practice,  but  some  manufacturers  give  datings  on 
large  orders,  often  requiring  a  trade  acceptance  in  such 
eases.  The  exceptions  to  the  regular  terms  which  are  found 
are  not  as  a  rule  confined  to  particular  products  which 
become  conspicuous  as  bearing  other  than  the  regular  terms. 

Jobbers  of  automobile  accessories  are  of  several  types. 
Distinction  is  made  between  legitimate  jobbers  and  semi- 
jobbers,  the  latter  of  whom  are  not  financially  able  to  take 
their  discount,  and  do  some  retail  selling.  Development 
during  the  past  few  years  has  been  twofold;  in  the  first 
place,  a  class  of  accessory  jobbers  has  become  segregated 
from  allied  lines  and  has  specialized  in  the  field  with  in- 
creasing financial  streng-th ;  on  the  other  hand,  an  increasing 
interest  has  been  shown  by  the  hardware  jobber  in  the 
automobile  accessory  business.  Retailers  are  of  three  types 
— specialty  dealers,  garage  men,  and  hardware  retailers. 
The  garage  man  will  naturally  be  the  largest  buyer  of 
products  which  require  installing,  while  the  specialty  re- 
tailer and  hardware  retailer  will  carry  the  balance.  The 
retailer  of  hardware  and  the  garage  and  car  dealer  do  most 
of  the  accessory  business  in  the  South  and  West,  while  in 
the  East  a  large  proportion  of  it  is  done  by  the  specialty 
retailers. 


242   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Terms  of  specialized  accessory  jobbers  in  general  are  the 
same  as  manufacturers'  terms.  While  they  themselves  in 
large  measure  take  the  discount,  their  customers  take  the 
net  30-day  terms,  although  terms  to  garage  men  are  often 
C.  0.  D.  Hardware  jobbers,  however,  in  general  apply  the 
regular  hardware  terms  of  2  per  cent  10  days,  net  60  days, 
to  the  automobile  accessories  they  handle,  other  than  tires, 
for  which  jobbers'  terms  are  almost  universally  the  same  as 
those  of  the  manufacturers.  Proximo  terms  are  employed 
in  some  cases.  Some  business  is  done  on  a  30-day  trade 
acceptance  basis  without  interest.  The  only  exception  to 
the  general  terms  is  found  in  the  case  of  heavier  shop  equip- 
ment to  garage  men  where  sale  is  made  on  contract  covered 
by  deed  or  title,  notes  being  taken  and  equal  payments  over 
6  to  8  months  specified.  An  alternative  method  where  less 
time  is  required  is  to  use  the  trade  acceptance,  splitting  the 
payment  by  taking  acceptances  for  30,  60,  and  90  days. 

Agricultural  Implements.* — The  ordinary  method  of  dis- 
tribution in  the  industry  is  from  manufacturer  to  branch 
house  to  retail  dealer  to  farmer,  and  the  great  bulk  of 
farm  implements  is  marketed  in  this  manner.  Smaller 
manufacturers,  however,  frequently  sell  to  jobbers,  who  in 
turn  sell  to  the  retail  dealers.  Many  manufacturers  dis- 
tribute a  comparatively  large  amount  of  their  implements 
through  other  manufacturers'  branch  houses.     The  branch 

*  In  the  preparation  of  this  statement,  extensive  use  has  been 
made  of  the  following  reports:  Report  of  the  Commissioner  of  Cor- 
porations on  The  International  Harvester  Company,  March  3,  1913. 
Eeport  of  the  Commissioner  of  Corporations  on  Farm-Machinery 
Trade  Associations,  March  15,  1915,  Report  of  tlie  Federal  Trade 
Commission  on  TJie  Causes  of  Hifih  Prices  of  Farm  Implements,  May 
4,  1920.  These  have  been  supplemented  by  the  reports  of  the  terms 
committee  and  the  proceedings  of  the  National  Implement  and 
Vehicle  Association,  and  by  inquiry  of  some  leading  manufacturers 
and  of  jobbers  in  the  various  sections  of  the  country.  Acknowledg- 
ment is  due  Mr.  H.  J.  Sameit,  Secretary,  National  Association  of 
Farm  Equipment  Manufacturers  (formerly  National  Implement  and 
Vehicle  Association),  for  reading  this  section. 


THE  AUTOMOTIVE  INDUSTRIES  243 

houses  are  thus  enabled  to  carry  a  complete  line  of  imple- 
ments. The  system  is  found  especially  in  the  upper  Mis- 
sissippi Valley.  A  recent  study  ^  shows  that  half  the  branch 
houses  of  27  leading  manufacturers,  having  282  branch 
houses  and  selling  to  140  jobbers,  are  located  in  9  states — 
Ohio,  Indiana,  Illinois,  Michigan,  Wisconsin,  Minnesota, 
Iowa,  Nebraska,  and  Missouri.  In  these  states  sales  are 
made  to  only  28  jobbing  houses.  Jobbing  houses  are  mostly 
located  in  the  far  western  and  southern  states.  The  above 
study  shows  that  8  states,  namely,  Oregon,  California, 
Texas,  Louisiana,  Arkansas,  Kentucky,  Georgia,  and  Vir- 
ginia, have  59  jobbing  houses  and  only  47  branch  houses. 
It  is  stated  that  "perhaps  more  tractors  are  sold  through 
independent  jobbers  or  distributors  than  any  other  class  of 
farm  machinery."  As  a  result  of  the  shortening  of  terms 
which  will  be  considered  below,  as  well  as  the  fear  of  pos- 
sible price  declines,  dealers  do  not  place  as  large  initial 
stock  orders  as  formerly,  and  direct  shipments  from  fac- 
tories to  dealers  have  decreased,  so  that  manufacturers  are 
required  to  carry  larger  stocks  at  distributing  points.  The 
two  outstanding  changes  in  distributive  methods  during 
recent  years  have  been  the  decrease  in  the  consignment  of 
goods  and  the  increase  in  the  number  of  branch  houses, 
especially  in  the  territories  such  as  California,  where  for- 
merly they  were  less  frequent. 

In  order  to  simplify  the  discussion,  the  principal  kinds  of 
agricultural  implements,  the  terms  on  which  will  be  con- 
sidered below,  may  be  conveniently  classified  as  follows: 
Farm  wagons ;  seeding  machinery,  including  planters,  grain 
drills,  etc. ;  harvesting  machinery,  including  binders  and 
mowers ;  tillage  implements,  including  plows,  harrows,  and 
cultivators;  and  thrashing  machinery  and  tractors. 

The  history  of  terms  in  the  industry  may  be  divided  into 

*  The  1920  report  of  the  Federal  Trade  Commission. 


244   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

two  periods,  the  line  of  division  being  the  year  1916.  From 
that  time  and  up  to  1922  the  standards  of  terms  in  the 
industry  have  been  represented  by  the  set  of  terms  pre- 
pared annually  by  a  committee  of  the  National  Implement 
and  Vehicle  Association,  which  was  appointed  in  October, 
1915.  The  terms  on  which  implements  are  sold  were  a 
favorite  competitive  device  with  manufacturers  in  the  past, 
additional  credit  being  granted  as  a  means  of  increasing 
the  volume  of  business.  The  farmer  usually  paid  part  cash 
at  the  close  of  the  harvesting  season  and  gave  a  promissory 
note  in  payment  for  the  remainder  in  one  or  two  annual 
installments.  "With  the  change  from  a  commission  to  a  sale 
basis,  local  dealers  gave  their  own  notes  to  the  manufac- 
turer, whereas  formerly  a  large  amount  of  farmers'  notes 
were  taken  by  the  latter.  Long  terms  have  been  most 
prominent  in  the  case  of  harvesting  machinery,  and  are 
stated  to  have  been  established  early  in  the  50 's  on  reaping 
machines.  In  1902,  the  usual  harvesting  machine  terms 
were  said  to  be  1/3  the  fall  of  the  year  when  purchased 
(called  cash),  1/3  the  fall  of  the  following  season,  and 
1/3  the  fall  of  the  second  season.  Excessive  competition, 
however,  frequently  extended  the  time  to  3  years,  while  it 
also  resulted  in  the  grant  of  one  year's  extra  time  without 
interest  when  crop  conditions  were  unfavorable.  Machines 
were  also  sold  at  the  close  of  the  harvest  on  what  was  called 
"next  year's  time"  without  interest,  the  first  payment  then 
only  being  due  the  following  fall.  Plows  and  special  tools 
were,  however,  sold  on  short  time  or  cash,  while  twine  was 
sold  principally  for  cash  in  the  fall  of  the  year  when  sold. 
About  1905  price  differentials  were  quoted  as  between  pay- 
ment in  cash  and  in  2  or  3  installments,  while  interest  was 
added  on  the  notes,  but  subsequently  only  time  prices  were 
quoted,  subject  to  specified  cash  discounts  for  prior  pay- 
ment. Terms  prevailing  in  1911,  for  several  leading  types 
of  implements  are  shown  in  the  following  table : 


THE  AUTOMOTIVE  INDUSTRIES 


245 


Notes  to  bear 

Pay- 
ments 
lim- 
ited 

Notes  to  mature 

not  later 

than — 

interest  from 

(or  from 

date  of  de- 

liveiy  of  the 

Agent's 
cash 

discount 
date 

to — 

machinery) 

Grain  binders 

Three 

Nov.  1,1911-12-13 

Sept.  1,  1911 

Oct.  1, 1911 

Corn  binders. 

do. 

do. 

Oct.    1,  1911 

Nov.  1,1911 

Reapers    .... 

Two 

Nov.  1, 1911-12 

Sept.  1,  1911 

Oct.  1, 1911 

Mowers 

do. 

do. 

do. 

do. 

The  system  of  long  credits  is  stated  to  have  been  extended 
to  products  other  than  harvesting  machinery,  such  as 
manure  spreaders  and  wagons.  The  increase  in  the  per- 
centage which  credit  sales  were  of  total  sales  in  the  domestic 
business  of  the  International  Harvester  Company  during 
the  period  1904-1911  is  as  follows : 


Year 

Per- 
centage of 
sales  for 
cash 

Per- 
centage of 

sales  for 
notes  and 

accounts 

1904* 

70.9 
74.4 
70.3 
67.3 
69.4 
68.9 
66.4 
64.2 

311 

1905 

•^SB 

1906 

29.7 

1907 

32  7 

1908 

30  6 

1909 

311 

1910 

33  6 

1911 

35  8 

*  Percentages  as  in  original  statement;  do  not  equal  100. 

The  data  in  the  following  table,  giving  the  percentage 
each  year  of  the  total  amount  of  notes  which  matured  the 
first  year,  second  year,  etc.,  also  bear  on  this  matter.    It  is 


246   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

seen  that,  while  notes  for  the  longer  terms  showed  an  almost 
uninterrupted  decline,  notes  maturing  the  first  year  de- 
creased slightly,  and  those  maturing  the  second  year  showed 
a  great  increase. 


Per- 

Per- 

Per- 

Per- 

Per- 

centage 

centage 

centage 

centage 

centage 

Year 

maturing 

maturing 

maturing 

maturing 

maturing 

first 

second 

third 

fourth 

fifth 

year 

year 

year 

year 

year 

1904 

34.7 

48.0 

14.4 

2.9 

•  •  • 

1905 

36.0 

50.4 

12.2 

1.4 

.  •  • 

1906 

30.5 

58.3 

10.2 

.9 

.1 

1907 

29.6 

63.0 

7.0 

.4 

... 

1908 

26.9 

66.3 

6.4 

.4 

..• 

1909 

26.5 

66.7 

6.2 

.6 

... 

1910 

25.9 

67.7 

6.0 

.4 

... 

1911 

28.9 

64.2 

6.5 

.4 

... 

The  efforts  of  the  committee  of  the  national  association 
have  been  along  the  line  of  more  uniform  and  shorter  terms. 
A  leading  purpose  has  been  to  reduce  the  amount  of  capital 
invested  in  relation  to  the  volume  of  business  done;  that 
is,  to  increase  the  rate  of  turnover.  The  terms  represent 
maximum  terms  only,  and  it  is  stated  in  the  committee's 
reports  that  "it  is  recommended  that  shorter  terms  should 
be  adopted  in  many  instances,  especially  where  states  are 
divided  by  trade  centers."  In  the  construction  of  these 
terms,  the  country  since  1916  has  been  divided  into  4  zones 
— the  central,  northern  (all  that  portion  of  the  United 
States  lying  north  of  the  southern  boundary  lines  of 
Oregon,  Idaho,  Wyoming,  South  Dakota,  Minnesota,  Wis- 
consin, Michigan,  and  New  York),  southern  (the  States  of 
North  Carolina,  South  Carolina,  Tennessee,  Arkansas, 
Louisiana,  Mississippi,  Alabama,  Georgia,  and  Florida), 
and  Texas.    The  time  granted  differs  in  the  various  zones, 


THE  AUTOMOTIVE  INDUSTRIES  247 

according  to  the  type  of  implement,  the  conditions  of  use 
in  the  particular  zone,  and  the  time  when  crop  returns 
are  received.  There  has  been  a  gradual  restriction  of  the 
use  of  the  "carry  clause,"  granting  additional  time  on  the 
portion  of  the  original  order  or  shipments  during  the  season 
remaining  unsold  at  the  close  of  the  selling  season  for  the 
implement  in  question. 

In  1916  and  1917,  the  committee  also  provided  "standard 
net  terms"  to  apply  to  all  goods  for  all  territories  except 
the  southern  zone.  These  were  substantially  on  the  basis 
of  2  per  cent  10  days,  net  60  days,  with  specified  datings  of 
March  1  and  July  1  for  shipments  during  certain  months. 
For  some  types  of  implements  the  dates  were  changed 
somewhat,  and  in  the  northern  zone  were  30  days  later 
throughout.  These  terms  reports  continued  in  force  until 
the  opening  of  1922,  when  they  were  withdrawn  because  of 
the  unsettled  business  and  economic  conditions  which  pre- 
sented so  many  new  and  different  conditions  to  the  member- 
ship. They  may  be  accepted  as  indicating  the  general  norm 
which  exists.  As  they  are  exceedingly  complex,  it  will  be 
possible  to  select  here  only  a  small  number  of  implements 
representative  of  the  various  classes. 

Wagons. — Until  recent  years  farm  wagons  were  manu- 
factured largely  by  firms  producing  this  article  only,  and 
where  manufacturers  have  extended  their  efforts  to  other 
lines,  this  has  generally  been  in  connection  with  motor 
vehicles.  In  1913,  usual  terms  were  "about  6  months  except 
in  straight  carload  lots,  which  could  be  carried  for  a  period 
of  9  months  or  a  year."  The  long  terms  customary  in  the 
South  prior  to  1916  caused  much  dissatisfaction,  and  in 
1915,  certain  southern  manufacturers  attempted  to  reduce 
terms  to  5  per  cent  30  days  to  4  months,  net  4  to  8  months, 
the  longer  periods,  both  for  cash  discount  and  net  terms, 
applying  on  larger  quantity  shipments.  At  a  joint  confer- 
ence meeting  of  the  wagon  department  of  the  National 


248   THE  MECHANISM  OF  COMMERCIAL  CREMT 

Implement  and  Vehicle  Association  and  the  Southern 
Wagon  Manufacturers'  Association  in  October,  1916,  it  was 
stated  that  it  was  evident  that  terms  were  being  shortened, 
due  largely  to  the  cash  terms  then  in  force  on  articles  pur- 
chased by  the  manufacturers,  and  the  latters'  narrow  mar- 
gin of  profit. 

In  November,  1916,  the  National  Implement  and  Vehicle 
Association  recommended  terms  on  local  shipments  of  5 
per  cent  30  days,  net  4  months,  with  certain  datings  on  car, 
half  car,  and  mixed  shipments,  such  as  5  per  cent  1/2  Sep- 
tember 1,  1/2  October  1,  net  December  1,  on  shipments  in 
April-August.  Alternative  use  of  terms  of  5  per  cent  30 
days,  net  4  months,  with  April  1  dating  on  December- 
March  shipments  and  the  same  datings  as  in  cotton  terri- 
tory, was  provided.  Subsequent  discussions  were  had  rela- 
tive to  further  shortening  of  terms,  and  in  1918,  the  ques- 
tion was  referred  to  a  special  committee  of  the  wagon 
department,  but  practically  no  changes  in  terms  were  made 
from  those  recommended  the  previous  year,  and  the  reports 
for  1919-1920  and  1920-1921  made  no  change  from  those  for 
1918-1919.  The  less-than-carload  terms  last  recommended 
were  5  per  cent  30  days,  net  4  months,  with  terms  on  car, 
half -car,  or  mixed-car  shipments  of  5  per  cent  June  1,  net 
September  1,  5  per  cent  September  15,  net  November  15, 
and  5  per  cent  December  1,  net  February  1,  on  December- 
March,  April-July,  and  August-November  shipments,  re- 
spectively, in  the  central  zone,  or  the  shorter  terms  of  the 
wagon  department  of  5  per  cent  30  days,  net  4  months,  on 
carload  quantities,  and  5  per  cent  15  days,  net  60  days,  on 
less-than-carload  lots,  December-March  shipments  taking 
April  1  dating. 

Seeding  Machinery. — In  March,  1916,  terms  recom- 
mended on  grain  drills  and  bar  seeders  for  the  central  zone 
called  for  net  September  1,  or  net  December  15,  with  a  cash 
discount  of  5  per  cent  on  May  1  or  October  1  respectively 


THE  AUTOMOTIVE  INDUSTRIES  249 

and  4  per  cent  on  December  1.    A  carry  clause  was  pro- 
vided for  both  original  spring  and  fall  purchases. 

Discount  dates  were  extended  30  days  in  the  northern 
zone  and  in  the  cotton  States.  The  terms  recommended  in 
1920  varied  from  zone  to  zone,  as  follows : 


Central  5  per  cent  May  1  net  Sept.  1 
Northern  5  per  cent  June  1  net  Nov.  1 
Southern  5  per  cent  April  1  net  July  1 
Texas       5  per  cent  April  1  net  July  1 


Fall 


5  per  cent  Oct.  1  net  Dec.  1 
5  per  cent  Oct.  1  net  Dec.  1 
5  per  cent  Nov.  1  net  Jan.  1 
5  per  cent  Oct.  1  net  Jan.  1 


Various  dates  for  shipment  were  also  specified.  The 
carry  clause,  applying  to  all  zones,  provides  that  ' '  any  por- 
tion of  original  spring  drill  orders  if  on  hand  May  1,  may 
be  settled  by  note  on  fall  terms  in  such  territories  as  have 
both  spring  and  fall  drill  trade,"  except  that  in  the  north- 
ern zone  the  date  is  June  1  instead. 

Harvesting  Machinery. — Little  change  has  occurred  in 
the  terms  noted  on  this  class  of  implements.  The  terms 
recommended  by  the  association  vary  somewhat  between 
the  different  zones.  Thus,  while  grain  binders  and  reapers 
in  the  central  and  southern  zones  bore  terms,  in  1917,  of  5 
per  cent  September  1,  net  November  1,  in  the  Texas  zone 
the  dates  were  1  month  earlier,  namely  August  1  and 
October  1,  and  in  the  northern  zone  1  month  later,  namely 
October  1  and  December  1.  The  only  changes  in  the  1920 
report  related  to  the  carry  clause,  which  now  covers  25 
per  cent  of  shipments  during  the  season  in  all  zones  other 
than  the  northern,  where  it  applies  to  50  per  cent  of  the 
original  order.  Where  unsold  on  September  1,  it  may  be 
settled  for  by  note  due  November  1  of  the  following  year, 
less  5  per  cent  on  September  1. 

Tillage  Implements. — In  this  class  of  implements  rela- 
tively slight  changes  have  occurred  in  the  recommended 


250    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

terms.     Taking  steel  and  chilled  walking  plows  as  typical, 
terms,  in  1917,  were  as  follows : 


Spring 

FaU 

Per 

cent 

Discount 

date 

Per 

cent 

Discount 
date 

Net 
date 

Per 

cent 

Discount 
date 

Net 
date 

Central 
Northern 
Southern 
Texas 

5 

5 
5 
5 

April  1 
Mayl 
March  1 
Feb.  1 

4 
4 

May  1 
June  1 

July  1 
Sept.  1 
June  1 
Mayl 

5 

5 
5 
5 

Sept.  1 
Oct.  1 
Oct.  1 
Oct.  1 

Nov.  1 
Dec.l 
Jan.  1 
Jan.  1 

Various  dates  for  shipment  were  also  specified.  In  1920, 
the  only  change  was  the  elimination  of  the  4  per  cent  dis- 
count in  the  central  and  northern  zones. 

Thrashing  Machinery  and  Tractors. — The  manufacture 
of  thrashers  was  developed  by  a  few  large  firms,  which  grad- 
ually extended  "their  business  into  other  lines,  particularly 
into  tractors  and  portable  engines."  Thrashing  outfits, 
including  engine  and  separator  with  an  attachment  for 
stacking  straw  and  chaff,  have  been  usually  sold  to  thrash- 
ermen,  who  thrash  grain  on  contract.  Due  to  the  expense 
of  the  outfits,  credit  sales  have  been  required,  assignment 
of  earnings  being  taken  as  security.  The  manufacturers 
early  were  interested  in  the  credit  problem,  and  it  was  the 
principal  matter  considered  at  their  first  meeting  in  1884. 
In  November,  1909,  a  resolution  was  passed  by  the  Thrasher 
Manufacturers'  Association  limiting  the  cash  discount  for 
the  year  1911  to  6  per  cent,  and  on  single  sales  fixing  a 
maximum  discount  to  agents  of  5  per  cent  30  days.  No  cash 
discount  was  to  be  allowed  after  90  days  from  delivery,  and 
the  date  for  the  agent's  cashing  all  his  season's  business 
was  to  be  fixed  in  the  contract.  In  1912,  it  was  reported 
that  more  complaints  had  been  received  than  ever  before 


THE  AUTOMOTIVE  INDUSTRIES  251 

about  selling  on  extremely  Ipi'ig  terms,  and  in  the  following 
year  "resolutions  were  adopted  recommending  that  mem- 
bers endeavor  to  increase  cash  payments  and  bring  about 
shorter  terms."  In  1917,  the  National  Implement  and 
Vehicle  Association  established  a  tractor  and  thrasher  de- 
partment, and  terms  have  been  regularly  considered  by  a 
committee.  In  1919,  the  committee  again  recommended 
the  terms  adopted  in  1918  for  the  year  1919,  but  inasmuch 
as  two  members  had  modified  them,  recommended  that  the 
modified  terms  be  made  known  to  all  the  members,  and  that 
the  adopted  terms  be  changed  to  meet  these  modifications. 
It  was  also  recommended  that  one  week 's  notice  to  the  com- 
mittee of  adoption  of  more  liberal  terms  by  any  member 
be  required.    The  last  recommended  terms  were  as  follows : 

Class  I  (of  specified  power,  or  costing  not  over  $1,500 
to  dealer). — 
To  consumers:  C.  0.  D.  or  1/2  C.  0.  D.  and  1/2  in  6 
months.  Deferred  maturity  December  1.  Future 
dating  shipments  after  November  1  and  before 
April  1  bear  April  1  (northern  zone  May  1). 
To  dealers:  Shipments  after  April  1,  cash  deposit 
of  $50  on  first  tractor  and  $25  on  each  additional 
one.  Note  for  balance  due  October  1  or  earlier. 
Small  separators — if  necessary,  •  25  per  cent  on 
delivery,  balance  in  fall  of  that  or  next  year. 

Class  II  ($l,500-$2,500).— Not  over  2  falls. 

Class  III  ($2,500  up).— Not  over  3  falls. 

Deposit  required  on  all  orders  in  Class  I  sold  for  cash 
on  delivery,  of  $50  on  first  and  $25  on  each  additional 
tractor.  Discounts  for  cash  on  delivery,  or  on  first  fall, 
not  over  6  per  cent ;  or  by  dealer  during  first  fall,  not  over 
10  per  cent,  for  payment  by  the  following  dates:  In 
southern  zone,  September  1;  central,  October  1;  northern 


252   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

and  Texas,  November  1.    Reports  from  various  sources  state 
that  tractors  are  now  sold  largely  on  a  cash  basis. 

Inasmuch  as  long  terms  have  prevailed  in  the  implement 
industry,  the  usual  practice  has  been  to  take  a  promissory 
note  to  cover  the  net  period,  rather  than  to  have  it  run  on 
open  account.  These  notes  have  varied  in  length  from  a 
few  months  to  3  or  4  years.  During  the  last  few  years  there 
has  been  a  strong  advocacy  of  the  trade  acceptance  by  the 
National  Association.  In  1916,  a  recommendation  of  the 
National  Association  of  Credit  Men  was  indorsed  "that 
sellers  send  notes  or  acceptances  for  purchaser's  signature 
with  all  invoices."  There  has  also  been  an  advocacy  in 
some  quarters  of  the  elimination  of  the  cash  discount.  In 
February,  1918,  the  wagon  department  recommended  to 
the  terms  committee  that  it  ''work  along  the  lines  of  the 
elimination  of  the  cash  discount,  with  the  wider  use  of  the 
trade  acceptance."  Accompanying  these  efforts  has  been 
an  attempt  to  have  the  retail  dealer  in  turn  obtain  paper, 
either  note  or  trade  acceptance,  from  the  farmer,  rather 
than  to  permit  the  account  to  run  along  on  open  account. 
Although  the  acceptance  is  used  only  to  a  limited  extent, 
reports  indicate  that  the  users  are  generally  satisfied  with  it. 

Up  to  recently  greater  uniformity  of  terms  and  lessening 
of  the  credit  period  has  existed.  The  financing  burden  has 
been  shifted  "from  the  manufacturer  to  the  retail  dealer 
and  the  local  country  bank."  This  change  is  reflected  in 
the  greater  rapidity  of  turnover  of  capital  invested  by 
manufacturers,  as  is  shown  by  the  table  opposite  covering 
22  companies: 

The  reduction  of  tJie  length  of  the  credit  period  not  only 
increased  the  rate  of  turnover,  but  also  decreased  the 
amount  of  bills  and  accounts  receivable,  as  well  as  the 
amount  of  capital  required  to  carry  on  a  given  volume  of 
business.    This  is  illustrated  in  the  following  table,  show- 


THE  AUTOMOTIVE  INDUSTRIES 


253 


Tear 


1913 
1914 
1915 
1916 
1917 
1918 


Total  invest- 
ment in 
implement 
business 


$355,782,398 
390,351,286 
395,722,107 
383,526,911 
367,525,626 
386,408,735 


Total  net 

sales 


$215,684,945 
195,647,453 
181,700,918 
200,848,125 
261,509,319 
326,636,666 


Period 

required 

for  one 

turnover 

(mos.) 


20 
24 
26 
23 
17 
14 


ing  the  animal  amount  of  bills  and  accounts  receivable  in 
the  case  of  the  above  manufacturers: 


Year 


Bills 
receivable 


Accounts 
receivable 


Total 


1913 
1914 
1915 
1916 
1917 
1918 


$95,947,970 
96,180,296 
83,165,828 
60,755,297 
46,419,128 
42,538,712 


$64,549,983 
68,627,542 
51,397,723 
45,525,797 
44,744,801 
44,512,811 


$160,497,953 

164,807,838 

134,563,551 

106,281,094 

91,163,929 

87,051,523 


It  will  be  observed  that  from  1913  to  1918,  the  receivables 
had  decreased  almost  50  per  cent,  notwithstanding  the 
increased  prices  of  implements  and  the  fact  that  gross  sales 
of  these  companies  increased  during  the  period  from 
$229,000,000  to  $339,000,000.  The  decrease,  it  has  been 
suggested,  may  have  been  due  partly  also  to  improved  busi- 
ness conditions,  which  made  it  possible  for  farmers  and 
retail  dealers  to  pay  cash  for  larger  amounts  of  their  goods. 

The  data  which  have  been  received  relative  to  jobbers* 
operations  indicate  that  in  this,  as  in  other  industries,  the 
jobber  purchases  largely  on  a  cash  basis,  while  selling  on 


254    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

credit  to  a  considerable  extent.  Their  own  terms  to  dealers 
are  stated  generally  to  follow  closely  those  made  by  manu- 
facturers, the  latter  providing  the  standard. 

Electrical  Products.^ — Considerable  variety  is  found 
both  in  terms  of  sale  and  in  marketing  methods  of  electrical 
products.  It  is  estimated  that,  on  the  whole,  about  65  per 
cent  of  the  output  of  electrical  appliance  manufacturers  is 
sold  to  jobbers,  25  per  cent  to  dealers  and  10  per  cent  to 
consumers.  Power  apparatus,  with  the  exception  of  small 
motors,  is  sold  direct  to  central  stations.  About  75  per  cent 
of  jobbers'  sales  are  to  dealers  and  25  per  cent  to  consumers. 
There  are  a  relatively  few  small  manufacturers  who  sell 
direct  to  the  consumer.  Distributive  methods  vary  greatly 
with  the  individual  products,  due  in  part  to  the  great 
variety  of  users.  These  range  all  the  way  from  railroads, 
street  railways,  telephone  companies,  central  stations  and 
industrial  corporations  on  the  one  hand,  to  the  individual 
buying  for  household  use  on  the  other,  and  the  character 
of  the  articles  differs  accordingly. 

In  a  general  way,  net  terms  granted  by  manufacturers 
are  either  30  or  60  days,  while  cash  discounts  vary  with 
different  articles.  Some  bear  no  discount,  while  at  the 
other  extreme  are  articles  bearing  5  per  cent.  Proximo 
terms  are  given  in  certain  cases.  On  the  average,  on  items 
handled  through  jobbers,  manufacturers'  terms  are  2  per 
cent  10  days,  net  60  days  to  jobbers  and  retailers  and  2  per 
cent  10  days,  net  30  days  to  consumers.  Very  large  orders 
and  orders  of  bulky  apparatus,  whether  handled  through 
middlemen  or  not,  are  sold  largely  on  a  contract  basis. 
Datings  are  rare,  but  in  certain  cases  a  series  of  trade  ac- 
ceptances is  used,  each  for  1/3  the  amount,  and  maturing 
in  30,  60,  and  90  days  respectively. 

*  Acknowledgment  is  due  Mr.  Franklin  Overbagh,  General  Sec- 
retary, Electrical  Supply  Jobbers'  Association,  for  reading  this 
section. 


THE  AUTOMOTIVE  INDUSTRIES  255 

Jobbers,  in  general,  give  to  their  customers  the  same  cash 
discounts  as  they  receive  from  the  manufacturers,  but  they 
may  vary  the  net  terms.  The  jobber's  regular  net  terms 
are  30  days,  while  he  may  be  quoted  net  60  days,  net  30 
days,  or  no  net  from  the  manufacturer.  In  1920  manufac- 
turers were  having  considerable  difficulty  in  keeping  job- 
bers supplied,  and  consequently  had  considerable  power  in 
making  their  own  terms,  while,  on  the  other  hand,  compe- 
tition among  jobbers  still  remained  keen  enough  to  make 
them  inclined  to  give  concessions  to  their  customers.  It  is 
understood  that  these  customers  in  many  cases  have  run 
beyond  the  nominal  net  period.  Offsetting  the  strategic 
position  of  the  manufacturer  is  the  rapid  growth  of  the 
industry  and  the  great  number  of  specialty  devices,  which 
make  the  service  of  the  jobber  not  only  of  great  value  but 
almost  essential  to  the  successful  introduction  of  these 
products.  In  the  jobbing  of  specialties  it  is  stated  that  the 
jobber  has  been  particularly  favored  due  to  the  absence  of 
reputable  retail  dealers,  and  the  result  has  been  that  the 
jobber,  receiving  regular  jobbing  price  quotations,  has  done 
retailing  himself.  However,  this  practice  is  declining  as  a 
class  of  reputable  retail  dealers  develops. 

The  products  of  the  industry  may  be  classified  into  the 
following  5  groups,  according  to  the  cash  discount  allowed. 
These  discounts  are  quoted  both  by  manufacturers  and  by 
jobbers  to  all  their  customers. 

1.  No  cash  discount,  net  30  days. 
Telephone  lead  covered  cable. 
Poles. 

Power  motors  and  fans. 
Transformers. 
Railway  supi^lies. 
Telephone  apparatus. 
Testing  instruments. 
Meters. 


256   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

High-tension  insulators. 
Washing  machines. 
Sewing  machines. 
Vacuum  cleaners. 
Dishwashers. 
Are  lamps. 

2.  One-half  per  cent,  10  days. 

Annimciator  wire. 
Bare  copper  wire. 
Mag-net  wire. 
Damp-proof  office  wire. 
Weatherproof  wire. 

3.  One  per  cent,  10  days. 

Cross  arms. 
LamjD  cord. 
Rubber  covered  wire. 
Lead  covered  wire. 
Line  hardware. 

4.  Two  per  cent,  10  days. 

Heating  material. 

Condulets. 

Dry  batteries. 

Storage  batteries. 

General  supplies. 

Porcelain  (except  high  tension). 

Sockets  and  receptacles. 

Snap  and  push  switches. 

Klaxon  horns. 

Hughes  ranges. 

Ironing  machines. 

Incandescent  lamps. 

5.  Five  per  cent,  10  days. 

Condulet  outlet  boxes  and  covers. 

Flexible  metallic  conduit  conductors  and  fittings. 

Rigid  iron  conduit. 

The  balance  of  the  products  are  sold  on  a  contract  basis. 
This  applies  to  rotaries,  larg:e  motors  and  generators,  large 
transformers,  and  large  switchboards;  that  is,  products 
which  are  usually  sold  direct  to  consumers,  involving  more 
or  less  installation  work.     Contracts  are  also  used  in  the 


THE  AUTOMOTIVE  INDUSTRIES  257 

case  of  large  orders  of  any  of  the  previously  mentioned 
products.  Standard  contracts  call  for  50  per  cent  cash, 
sight  draft,  bill  of  lading  attached,  40  per  cent  in  30  days, 
and  10  per  cent  in  60  days.  These  terms,  however,  are 
varied  in  accordance  with  the  credit  standing  of  the  cus- 
tomer as  well  as  the  progress  of  the  installation  work,  the 
last  payment  in  the  latter  case  being  so  arranged  as  to  fall 
due  when  the  work  is  completed.  Selling  goods  on  con- 
signment is  an  exception,  but  some  large  manufacturers  of 
fan  motors  sell  their  product  on  this  basis.  Some  manu- 
facturers grant  10th  proximo  terms  to  approved  customers 
or  to  those  settling  regularly  on  a  monthly  basis.  In  cer- 
tain cases  semi-monthly  settlement,  for  example  on  the  10th 
and  25th,  is  provided.  On  large  orders  of  electrical  wiring 
devices  the  standard  contract  terms  are  1/3  on  delivery, 
1/3  in  30  days,  and  1/3  in  60  days. 

The  regular  net  terms  of  jobbers  are  30  days,  while  the 
discounts  granted  are  those  already  indicated.  Interest  is 
generally  at  the  rate  of  6  per  cent  after  the  due  date  is 
passed,  and  overdue  bills  are  subject  to  sight  draft  without 
notice.  The  trade  acceptance  is  used  more  by  jobbers  in 
this  line  than  by  manufacturers  and  as  a  matter  of  fact  is 
quite  generally  used.  Thirty-day  acceptances  are  most  com- 
mon and  are  mailed  with  the  statement  on  an  average  15 
days  after  the  sale,  so  that  settlement  occurs  in  45  days, 
which  corresponds  to  the  current  collection  period  on  open 
accounts.  Some  customers  may  give  a  60-da3^  trade  accept- 
ance, instead  of  the  30-day,  Jobbers  may  allow  their  large 
customers  to  settle  on  the  10th  proximo. 

Coal  and  Coke.^ — Anthracite  coal  is  generally  sold  by 
the  railroad  coal  companies  through  sales  agents  direct  to 
manufacturing  plants  and  to  dealers.     While  several  of 


'  Acknowledgment  is  due  Mr.  Geo.  H.  Gushing,  Managing  Director, 
American  Wholesale  Coal  Association,  for  reading  this  section. 


258   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

the  independent  producers  sell  to  retailers  direct,^  the 
greater  number  market  their  coal  through  ''jobbers"  on  a 
commission  basis,  and  a  few  sell  outright  to  jobbers  and 
retailers,  disposing  of  their  product  from  week  to  week  to 
the  highest  bidders.  A  considerable  amount  of  coal  is  con- 
signed by  producers  to  local  wholesalers  or  retailers. 
Jobbing,  in  the  restricted  sense  of  sale  by  carload  or  barge 
load  without  physical  handling  but  with  outright  purchase 
of  the  coal  (thus  excluding  sales  agencies)  is  on  the  whole 
relatively  small  in  the  case  of  anthracite,  but  a  considerable 
proportion  of  bituminous  coal  is  handled  through  jobbers. 
The  methods  of  transacting  the  business  are  less  rigid  and 
definitely  fixed  in  the  case  of  bituminous  coal,  in  particular 
with  regard  to  retail  dealers  who  handle  the  same.  Jobbers 
in  large  part,  however,  do  not  rigidly  confine  themselves  to 
handling  only  either  anthracite  or  bituminous.  In  the  case 
of  anthracite  there  is  a  considerable  overlapping  between 
the  two  classes  of  jobbers.  Most  jobbers  supply  the  local 
trade  only,  although  a  few  maintain  branch  offices  at  vari- 
ous points.  In  certain  centers,  for  example,  Buffalo,  De- 
troit, and  Chicago,  there  exist,  in  addition,  local  wholesale 
trestle  and  dock  companies,  who  in  some  cases  do  also  a 
retail  business. 

In  certain  sections  of  the  country,  the  movement  of  coal 
is  distinctly  seasonal,  whereas  in  other  sections  it  is  stored 
to  a  greater  or  lesser  extent.  The  territory  beyond  the 
head  of  the  Great  Lakes  is  very  largely  supplied  by  ship- 
ments up  the  lakes  during  the  summer,  which  are  stored  on 
the  docks  and  shipped  out  during  the  fall  and  winter 
months  as  needed.  Some  all-rail  coal  from  Illinois  and 
Indiana  fields,  however,  goes  to  the  Northwest  during  the 
winter.     To  a  certain  extent  winter  supplies  of  coal  are 

*  The  data  relative  to  anthracite  coal  contained  in  this  paragraph 
have  been  taken  from  the  Report  of  the  Federal  Trade  Commission 
on  Anthracite  and  Bitummous  Coal,  June  20,  1917. 


THE  AUTOMOTIVE  INDUSTRIES  259 

moved  into  New  England  during  the  summer,  although 
both  rail  and  water-line  coal  also  move  in  during  the  winter. 
There  is  some  storage  in  northern  New  York.  Bituminous 
coal  is  stored  to  some  extent  during  the  summer  by  business 
houses,  but  over  the  remainder  of  the  United  States  the 
movement  of  coal  is  largely  seasonal.  As  is  well  known, 
storage  is  more  difficult  in  the  case  of  bituminous  than  in 
the  case  of  anthracite,  both  because  of  the  deterioration  of 
the  softer  bituminous  and  because  of  danger  of  spontaneous 
combustion  when  the  coal  is  not  properly  stored. 

Distinction  should  be  made  in  the  methods  of  conducting 
business  between  the  territory  east  of  a  line  north  and 
south  through  Erie  and  Pittsburgh,  and  the  territory  west 
thereof  extending  to  the  Rocky  Mountains.  In  the  East 
the  tonnage  is  larger,  the  qualities  of  coal  differ,  and 
methods  of  merchandising  are  entirely  different  from  those 
in  the  West.  In  the  East  supply  and  demand  are  more 
nearly  equal,  whereas  in  the  western  section  a  buyer's 
market  has  almost  uniformly  prevailed.  There  has  been  a 
corresponding  difference  in  the  degree  to  which  business 
terms  may  be  insisted  upon. 

Producers'  terms  on  anthracite  are  practically  univer- 
sally net  30  days.  In  certain  cases  proximo  terms,  for 
example,  the  15th,  are  provided.  Provision  is  made  for  the 
requirement  of  payment  in  advance  for  further  shipments 
if  the  credit  of  the  customer  is  impaired,  or  cancellation  of 
the  contract  at  the  seller's  option  in  case  the  amount  is 
unpaid.  In  certain  cases  anticipation  at  the  rate  of  6  per 
cent  per  annum  is  provided,  or  1/2  per  cent  is  given  for 
payment  within  10  days.  The  same  rate  of  interest  is 
charged  on  overdue  accounts.  The  coal  which  is  purchased 
outright  by  dock  companies  at  the  head  of  the  Great  Lakes, 
rather  than  handled  on  consignment,  generally  bears  terms 
of  net  60  days  from  date  of  bill  of  lading. 

Bituminous    coal    is    generally    sold    by    producers    on 


260    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

proximo  terms,  the  15th  being  perhaps  most  frequent, 
although  dates  range  from  the  10th  to  the  25th.  In  some 
cases  settlement  twice  a  month,  for  example,  by  the  5th 
and  20th,  is  required.  While  proximo  terms  are  customary 
in  the  case  of  contract  business,  in  some  cases  net  30  days 
is  specified,  and  it  is  largely  used  for  spot  or  open  market 
sales.  Longer  terms,  such  as  60  days,  are  given  in  some  in- 
stances, although  producers  in  many  cases  use  the  uniform 
sales  contract  containing  a  clav^se  similar  to  that  con- 
tained in  the  anthracite  producers'  contract  providing  for 
cancellation  of  the  contract  at  the  seller's  option  in  case 
the  account  is  unpaid,  or  the  credit  of  the  purchaser  is 
impaired,  also  that  accounts  10  days  overdue  are  subject  to 
sight  draft  with  interest  from  time  of  maturity. 

This  by  no  means  implies,  however,  that  settlement 
has  been  prompt  in  all  cases."  From  certain  sections  it 
has  been  stated  that  purchasers  largely  run  beyond  the 
due  date,  one  producer  stating  that  payments  in  general 
are  effected  from  15  to  45  days  thereafter,  and  that 
although  it  is  endeavored  to  collect  interest  for  the  extra 
time  taken,  it  is  next  to  impossible  to  do  so.  In  one  field 
an  account  is  rarely  considered  old  until  60  days  past  due 
w'hile  it  is  stated  in  others,  that  few  purchasers  make 
payments  until  the  coal  reaches  its  destination,  and  some 
only  on  the  10th  proximo  thereafter.  Payment  is  thus  made 
on  the  basis  of  coal  received  rather  than  on  coal  shipped. 

The  railroads  are  stated  often  to  take  up  to  90  days, 
while  in  certain  cases  longer  terms  are  given  them  than  are 
given  other  purchasers.  In  several  western  fields  large 
steam  users  receive  up  to  60  days,  whereas  30-day  terms  are 
specified  for  ordinary  consumers  and  dealers.  Lake  and 
tidewater  shipments,  on  account  of  longer  time  between 

'  Operators  at  times,  however,  may  receive  payment  in  less  than  the 
customary  30  days,  in  order  to  encourage  shipments  or  to  assist  in 
financing  them. 


THE  AUTOMOTIVE  INDUSTRIES  261 

date  of  shipment  and  actual  consumption  of  the  coal,  also 
bear  longer  terms  than  do  ordinary  shipments,  net  30  or 
60  days  from  date  of  loading  at  the  port  being  frequent, 
although  in  some  cases  interest  at  the  rate  of  6  per  cent  per 
annum  is  charged  for  time  beyond  30  days.  When  this 
extra  time  is  given,  the  purchaser  is  stated  usually  to  sign 
an  acceptance.  Discounts  for  cash  are  very  rare.  In  some 
cases  anticipation  is  allowed  at  the  rate  of  6  per  cent  per 
annum,  in  other  cases,  1/2  per  cent  10  days  is  given,  while 
in  one  of  the  southern  fields  cash  discounts  up  to  2  per 
cent  are  reported. 

Coke,  in  particular  by-product  coke,  is  produced  by  cer- 
tain of  the  large  consumers  themselves,  or  by  plants  which 
they  control.  All  coke  is  generally  sold  on  terms  calling 
for  payment  by  the  20th  proximo,  but  in  some  cases  the 
10th,  15th,  or  25th  is  specified.  Certain  purchasers  are 
stated  to  elect  to  make  settlement  twice  a  month  instead. 
A  sight  draft  with  bill  of  lading  attached,  as  in  other  indus- 
tries, is  generally  used  only  in  the  case  of  poor  credit 
risks.  Furnace  coke  is  largely  sold  to  steel  producers,  but 
there  are  many  small  foundries  -Cvhich  purchase  foundry 
coke.  At  times  the  financial  responsibility  of  some  foun- 
dries is  somewhat  impaired,  but  ordinarily  little  difficulty  is 
found  in  making  collections.  In  very  rare  cases,  a  note  is 
accepted  for  foundry  or  domestic  coke  that  is  put  into  stock 
for  future  use.  There  have  been  no  general  changes  in 
terms  in  the  coal  and  coke  industry  for  15  years  or  more. 

"Wholesalers'  terms  on  both  anthracite  and  bituminous 
in  large  measure  parallel  operators'.  Proximo  terms  are 
largely  employed,  such  as  the  10th  and  15th.  Anticipation 
is  permitted  in  certain  cases,  such  as  for  tidewater  coal  at 
New  York,  at  the  rate  of  6  per  cent  per  annum,  correspond- 
ing to  a  cash  basis  of  1  per  cent.  Spot  sales  on  anthracite 
at  New  York  bear  the  same  terms  as  contract  sales,  namely, 
15th  proximo  (formerly  the  25th),  although  sales  are  often 


262    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

made  for  cash,  and  a  slightly  lesser  price,  such  as  5  cents 
per  ton,  is  quoted  in  such  cases.  The  average  purchaser  of 
bituminous  is  said  to  be  less  prompt  than  the  average  re- 
tailer of  anthracite,  and  accounts,  for  example,  at  New 
York  and  Boston,  often  run  to  90  or  120  days.  When  busi- 
ness is  normal  it  is  stated  from  Boston  that  anthracite 
wholesalers  often  extend  considerably  longer  than  30  days, 
but  in  times  of  shortage  the  prompt  collections  made  by 
retailers  enable  prompter  payment  of  wholesalers.  It  was 
stated  in  the  study  cited  above  that  the  extension  of  credit 
has  some  influence  upon  the  choice  of  coal  handled  by  the 
local  dealer,  and  practical  and  exclusive  connections  are 
made  when  he  is  carried  by  the  wholesaler. 

Petroleum.^" — The  commercial  organization  of  the  petro- 
leum industry  at  the  present  time  is  exceedingly  complex. ^^ 
Whereas  in  the  earlier  days  there  was  a  rather  well-defined 
division  of  the  field  into  production,  transportation,  refin- 
ing and  marketing  (though  the  latter  two  were  often  com- 
bined), there  is  now  considerable  combination  of  all  four 
classes  of  business.  There  is  an  increasing  tendency  for  the 
larger  units  to  sell  to  consumers,  and  the  systems  of  service 
and  filling  stations  are  being  steadily  extended,  as  well  as 
the  tank-wagon  service.  In  the  remote  sections  there  is, 
of  course,  the  greatest  dependence  upon  the  local  dealer. 

The  method  of  marketing  varies  with  the  type  of  product. 
Crude  oil  is  purchased  by  refiners  to  some  extent,  although 
the  larger  companies  obtain  a  considerable  supply  from 
their  own  wells  or  those  of  affiliated  companies.  Refiners, 
to  some  extent,  sell  the  various  petroleum  products  to  one 
another.  Aside  from  such  sales,  the  lighter  products,  such 
as  gasoline  and  kerosene,  as  well  as  lubricating  oil,  are  sold 

"Acknowledgment  is  due  Mr.  A.  S.  Price,  Credit  Manager,  Tide 
Water  Oil  Co.,  for  reading  this  section. 

"  Certain  of  the  data  on  this  subject  have  been  taken  from  the 
studies  of  the  Federal  Trade  Commission,  in  particular  the  Report 
on  The  Price  of  Gasoline  in  1915,  April  11,  1917. 


THE  AUTOMOTIVE  INDUSTRIES  263 

by  refiners  to  jobbers  and  retailers,  and  direct  to  large  con- 
sumers. Fuel  oil  (including  also  gas  oil  and  road  oil), 
on  the  other  hand,  while  often  sold  to  jobbers,  is  usually 
sold  direct  to  consumers,  estimates  placing  the  amount  so 
sold  at  upwards  of  80  to  90  per  cent  of  the  output.  In 
certain  eases  refiners  dispose  only  of  their  surplus  products, 
such  as  fuel  oil,  to  jobbers,  while  selling  the  other  products 
direct  to  retailers  and  consumers.  In  the  Middle  Western 
States,  a  large  number  of  relatively  small  refiners  have 
grown  up,  who  depend  to  a  great  extent  upon  separate 
jobbers  for  the  marketing  of  their  products,  which,  how- 
ever, include  relatively  little  lubricating  oil.  Jobbers'  cus- 
tomers are  stated  by  some  to  be  considerably  smaller  than 
customers  of  refiners.  Middle  western  refiners'  sales  to 
jobbers  vary  in  amount  from  1  to  1,000  tank  cars,  and 
sales  of  from  100  to  200  cars  are  very  common.  Sales  from 
jobbers  to  dealers  and  consumers  range  in  amount  from  5 
to  1,000  gallons,  delivery  usually  being  made  from  tank 
wagon,  except  in  the  case  of  lubricating  oil,  which  is  usually 
shipped  in  drums  of  50  gallons. 

Judging  from  the  data  available,  there  appears  to  have 
been  little  attempt  to  obtain  absolute  uniformity  of  terms 
in  the  industry  during  the  past  decade.  Only  one  instance 
has  come  to  notice  of  formal  recommendation  of  terms. 
In  1913,  a  middle  Avestern  association  representing  inde- 
pendent marketing  interests  adopted  a  set  of  regulations  to 
govern  trading  in  petroleum.  These  regulations  were  con- 
cerned more  particularly  with  questions  such  as  fixing 
standards  for  the  various  petroleum  products  in  order  to 
avoid  disputes  over  the  specific  gravity  or  viscosity  of  oils, 
what  constitutes  a  good  delivery,  etc.  The  regulations  con- 
tained a  section  dealing  with  terms,  and  were  revised  in 
1915.  Rqgular  terras,  however,  are  generally  recognized  for 
each  of  the  principal  classes  of  petroleum  products.  A 
basis  for  an  understanding  of  the  differences  in  terms  as 


264    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

between  the  various  products  is  afforded  by  the  differences 
in  marketing  methods  outlined  above.  For  several  years 
there  was  a  shortening  of  terms  on  the  refined  products,  in 
particular  about  1918.  The  trade  acceptance  also  came  into 
some  use.  It  is  estimated  by  a  large  eastern  refiner  in 
1920,  that  collections  in  the  industry,  in  general,  averaged 
about  45  days.    Garages  on  the  whole  were  slowest  pay. 

Turning  to  the  individual  products,  crude  oil  is  sold 
on  strictly  net  terms.  Settlement  is  required  either  once  or 
twice  a  month.  The  dates  are  stated  generally  to  be  the 
10th  and  25th  in  the  mid-continent  field.  In  some  sections 
considerable  variation  is  noted,  different  California  refiners, 
for  example,  placing  the  figure  variously  at  the  10th,  20th, 
and  the  15th  to  the  25th. 

The  shortening  of  terms  in  the  industry  is  well  illustrated 
in  the  case  of  the  lighter  refined  products,  such  as  gasoline 
and  kerosene.  These  now  bear  terms  of  net  30  days.  Prox- 
imo terms  such  as  the  15th  may  be  specified  in  certain  cases. 
A  discount  of  1  per  cent  for  payment  within  10  days  pre- 
vails in  some  sections,  in  particular  the  mid-continent  field, 
and  such,  in  fact,  are  the  recommended  terms  on  these 
products  mentioned  above.  These  products  are  stated  to 
be  generally  considered  as  cash  products  in  that  field,  and 
it  is  said  that  the  customer  who  takes  30  days'  time  is 
frequently  regarded  as  undesirable,  almost  all  firms  dis- 
counting their  bills,  A  sight  draft  has  largely  succeeded 
the  use  of  the  recommended  terms  for  all  the  classes  of 
refined  petroleum  products.  Prior  to  December  1,  1918, 
a  cash  discount  of  2  per  cent  10  days  had  been  allowed  in 
California  in  many  cases,  although  one  of  the  leading  com- 
panies had  as  its  terms  2  per  cent  10  days,  net  60  days, 
when  contained  in  cases,  drums,  and  iron  barrels,  and  1 
per  cent  10  days,  net  60  days,  under  special  contract  at 
special  prices.  Prior  to  about  1918,  the  net  period  was 
largely  60  days  in  many  sections. 


THE  AUTOMOTIVE  INDUSTRIES  265 

Distinction  is  made  by  certain  refiners  between  carload 
shipments  on  the  one  hand  and  less-than-carload  shipments 
and  deliveries  in  bulk  from  stations  and  out  of  tank  wagons 
on  the  other  hand,  corresponding  in  considerable  measure 
to  a  difference  in  type  of  purchaser.  Oil  jobbers  having 
bulk  storage  purchase  in  carload  lots,  which  they  barrel  or 
can  and  ship  to  factories,  garages,  and  storekeepers.  Gaso- 
line is  sold  by  refiners,  in  addition  to  tractor  and  automobile 
manufacturers  and  to  large  garages.  Whereas  the  carload 
shipments  bear  the  regular  terms  given  above,  less-than- 
carload  shipments  bear  considerably  shorter  terms.  In 
particular,  for  tank-wagon  deliveries  and  filling-station 
sales  net  cash  is  largely  required.  Weekly  or  10-day  settle- 
ment is  now  specified  in  certain  cases,  whereas  formerly 
monthly  settlement  was  largely  permitted  and  is  still  to 
some  extent.  These  terms  apply,  in  general,  to  other  refined 
products  also. 

Branded  automobile  oils  are  sold  in  carload  lots  by  only 
a  small  number  of  the  larger  companies,  the  purchasers 
being  garages  and  automobile-accessory  jobbers.  Terms  on 
both  carload  and  less-than-carload  business  are  largely  1 
per  cent  10  days,  net  30  days.  In  the  case  of  lubricating 
oils  and  greases  and  wax,  carload  lots  are  sold  more  partic- 
ularly to  jobbers  such  as  mentioned  above.  One  refiner 
applies  the  regular  net  30-day  terms  to  carload  business  but 
grants  a  discount  of  1  per  cent  10  days  on  less-than-carload 
shipments  and  bulk  deliveries  from  stations  and  out  of 
tank  wagons.  In  the  latter  sphere  competition  is  experi- 
enced, not  only  with  the  limited  number  of  refiners  doing 
a  carload  business,  but  also  with  those  refiners  doing  a 
less-than-carload  business  and  the  jobbers  who  do  practi- 
cally nothing  but  a  less-than-carload  business.  In  California 
the  discount  was  eliminated  December  1,  1918,  and  terms 
are  now  net  30  days  or  net  60  days,  proximo  terms,  such 
as  the  10th,  being  employed  in  some  cases,  whereas  formerly 


266    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

a  2  per  cent  discount  had  been  largely  given.  A  leading 
refiner  selling  largely  to  railways  has  terms  of  net  60  days. 
The  product  in  'general,  however,  still  largely  carries  a 
cash  discount.  In  the  mid-continent  field  terms  are  either 
2  per  cent  10  days,  net  60  days,  or  1  per  cent  10  days,  net 
30  days.  The  former  are  also  the  terms  recommended  by 
the  association  mentioned  above,  but  prior  to  1915  the 
net  period  was  only  30  days.  Each  of  the  two  sets  of  terms 
prevalent  in  the  mid-continent  field  is  now  used  by  some 
of  the  larger  refiners  in  other  sections,  and  no  absolute 
uniformity  of  practice  prevails.  A  more  or  less  general 
tendency,  however,  has  appeared  to  be  evident  toward 
terms  of  1  per  cent  10  days,  net  30  days.  It  has  been 
suggested  that  the  generally  longer  terms  and  cash  discount 
prevalent  on  lubricating  products  are  due  to  the  fact  that 
they  are  more  of  a  specialty  and  consequently  of  a  less 
rapid  turnover  as  compared  with  other  products,  such  as 
gasoline. 

Terms  on  fuel  oil  (including  gas  oil  and  road  oil)  are 
almost  uniformly  net  30  days.  In  certain  cases  proximo 
terms  are  employed,  such  as  the  10th.  A  middle  western 
jobber,  however,  reports  that  he  receives  a  cash  discount 
of  1  per  cent  10  days  from  refiners  on  this  product,  and  a 
large  refiner  states  that  such  terms  w^re  occasionally  given 
up  to  about  four  years  ago.  In  the  Southwest,  cash  on 
delivery  is  largely  specified.  These  terms  obtain  also  on 
bunker  deliveries.  In  some  instances  up  to  90  days  is  given 
to  contractors  in  the  case  of  sales  of  road  oil,  while  terms 
of  a  leading  refiner  are  net  60  days  to  roofing  manufac- 
turers. Purchasers  of  all  three  products,  as  a  rule,  pay 
more  promptly  than  do  purchasers  of  the  other  two  prin- 
cipal classes  of  products.  Municipalities  are  stated  to  be 
the  slowest-paying  type  of  purchaser  of  this  class  of 
product.  In  certain  southwestern  districts,  in  particular  in 
rice-growing  sections,  fuel  distillate  is  delivered  to  farmers 


THE  AUTOMOTIVE  INDUSTRIES  267 

on  contract  in  the  spring  and  summer,  with  October  1  or 
November  1  due  date. 

It  is  stated  rather  often  in  the  industry  that  jobbers' 
terms  are  longer  than  refiners'  on  similar  products.  In  the 
case  of  the  lighter  oils,  less  than  carload  shipments,  in 
general,  bear  terms  of  1  per  cent  10  days,  net  30  days, 
and  lubricating  oil  bears  instead  a  discount  of  2  per  cent. 
In  some  cases,  middle  western  jobbers'  terms  are  given  as 
net  30  days  on  gasoline  and  net  60  days  on  lubricating 
oil.  Certain  jobbers,  however,  state  that,  while  their  terms 
from  refiners  on  the  several  products  differ  as  indicated 
above,  they  endeavor  to  make  their  terms  uniformly  1  per 
cent  10  days,  net  30  days,  on  all  products.  The  net  period 
on  lubricating  oil  some  years  ago  was  60  days.  In  some 
cases  1/2  per  cent  10  days,  net  30  days,  is  quoted  on  refined 
oil  and  gasoline  and  1  per  cent  10  days,  net  30  days,  on 
lubricating  products.  While  these  are  the  nominal  terms, 
purchasers  are  stated  in  certain  cases  to  take  longer  time. 
It  is  reported  that  from  60  days  to  6  months  is  frequently 
extended  by  middle  western  jobbers.  Tank-wagon  deliver- 
ies of  gasoline  and  kerosene,  however,  are  usually  on  a  net 
cash  basis,  as  in  the  case  of  similar  sales  by  refiners.  In 
some  cases  the  time  has  been  reduced  from  15  to  30  days 
since  about  1917. 


CHAPTER  XIV 

THE  TEXTILE  MANUFACTURING  AND  DRY  GOODS  INDUSTRIES 

The  present  chapter  deals  with  a  group  of  articles  which 
are  destined,  in  last  analysis,  chiefly  for  consumptive  in- 
stead of  for  industrial  use.^  Most  important  among  these 
products  is  cloth,  either  cotton,  wool  or  silk.  It  passes  into 
use  via  one  of  two  channels — the  garment  manufacturer 
producing  ready-to-wear  apparel,  or  the  distributor.  Con- 
sideration of  terms  in  the  apparel  lines  will  be  deferred 
until  the  following  chapter. 

An  outstanding  feature  from  the  point  of  view  of  terms 
of  sale  is  the  fact  that  the  goods  pass  into  consumption 
largely  at  certain  seasons  of  the  year.  This  means  that 
the  retailer  must  defer  payment  until  he  has  in  hand 
receipts  from  his  period  of  heavy  sales.  This  may  be  done 
either  through  a  regular  season  dating  or  through  an  extra 
dating.  Similarly,  the  wholesale  distributor  and  the  cloth- 
ing manufacturer  also  require  time  and  obtain  a  dating 
from  the  cloth  manufacturer.  In  other  words,  the  period 
of  time  elapsing  between  initial  manufacture  and  jSnal 
purchase  by  the  consumer  is  divided  between  the  several 
factors  engaged  in  producing  and  distributing  the  article, 
and  each  bears  part  of  the  burden.  Only  in  certain  cases, 
such  as  for  articles  serving  manufacturers  as  raw  material 
(for  example,  yarns  and  cotton  grey  goods)  is  it  possible 
to  have  terms  approximate  cash.  Net  10  days,  in  fact,  is 
often  specified  for  these  articles. 

^  Certain  of  the  data  relative  to  methods  of  distribution  in  the 
textile  industry  contained  in  this  chapter  have  been  ta'.en  from. 
Cherington,  The  Wool  Industry  (Chicago,  1916). 

268 


TEXTILE  MANUFACTURING  INDUSTRIES    269 

The  manner  in  which  the  carrying  burden  is  divided 
depends  on  the  relative  strength  of  cloth  manufacturer 
and  wholesale  distributor  or  clothing  manufacturer.  The 
retailer  in  any  event  is  carried  until  his  sales  season.  The 
problem  is  accentuated  by  the  fact  that  these  industries  are 
by  no  means  concentrated  and  a  large  number  of  individuals 
are  found  in  them  who  possess  little  capital.  Accordingly, 
considerable  lack  of  uniformity  in  terms  is  possible  and 
furthermore  the  terms  tend  to  vary  at  different  times  ac- 
cording to  market  conditions.  During  the  war  period  there 
was  considerable  scarcity  of  some  classes  of  goods,  such  as 
certain  cottons,  underwear  and  hosiery,  and  manufacturers 
in  many  instances  shortened  their  terms  to  10  days. 

The  discounts  quoted  in  these  lines  are  of  two  kinds. 
They  may  conveniently  be  termed  respectively  the  dry- 
goods  and  the  apparel  discounts.  The  standard  dry-goods 
terms  are  2  per  cent  10  days,  60  days  extra,  with  season  dat- 
ing in  some  cases,  and  these  apply  as  well  to  manufacturers' 
sales  under  normal  conditions  of  cotton  goods  and  under- 
wear. On  the  other  hand,  in  the  distinctly  apparel  lines 
high  discounts  are  the  rule.  These  are  found  both  for 
woolen  piece  goods  and  men's- wear  jobbers,  silks,  laces  and 
embroideries.  The  standard  woolen  terms,  for  example, 
are  7  per  cent  4  months  and  graded  discounts  are  employed, 
the  highest  discount  being  10  per  cent  10  days.  In  all  the 
apparel  lines  these  graded  discounts  (declining  in  size  as 
the  terms  lengthen)  are  found  as  a  general  rule.  It  should 
be  noted,  however,  that  during  the  war  period  certain 
woolen  manufacturers  were  able  to  change  terms  generally 
to  either  10  per  cent  30  days  or  net  30  days. 

Cotton-  Yarns  and  Thread — Cotton  thread  is  sold  to 
both  manufacturers  of  garments,  etc.,  and  to  wholesalers 

'  Acknowledgment  is  due  Mr.  Elroy  Curtis  of  Seaboard  Mills,  Inc., 
New  York;  Mr.  Melbourne  Smith,  Managing  Editor,  and  Mr.  Harry 
Riemer,  Cottoa  Goods  Editor,  Daily  News  Record,  for  reading  this 
section. 


270    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

and  retailers.  There  are  two  corresponding  special  branches 
of  the  industry,  manufacturers  in  many  cases  producing 
only  thread  for  one  of  the  two  uses.  On  a  yardage  basis, 
about  half  the  output  consists  of  each  type.  Sales  are  made 
through  selling  agents  or  branch  houses.  It  is  estimated 
that  from  70  to  80  per  cent  of  the  domestic  line  is  sold 
to  jobbers  as  against  retailers.  Terms,  however,  are  uni- 
formly 2  per  cent  10  days,  1  per  cent  30  days,  net  60  days, 
e.  0.  m.  terms  being  given  in  certain  cases. 

The  large  majority  of  cloth  manufacturers  produce  their 
own  yarns.^  On  the  other  hand,  the  bulk  of  the  knitters 
buy  their  yarn,  although  there  was  for  a  time  a  considerable 
tendency  among  knitting  mills  to  install  spinning  plants. 
Sales  by  yarn  manufacturers  are  made  either  direct  to 
these  two  classes  of  purchasers,  or  through  brokers  and 
commission  houses.  A  tendency  toward  direct  sale  is  re- 
ported, in  particular  for  hosiery  yarns.  It  has  been 
estimated  that  roughly  50  per  cent  of  southern  spin- 
ners market  their  entire  production  through  commission 
houses.  Less  use  is  made  of  middlemen  by  northern  manu- 
facturers. 

With  respect  to  terms  of  sale,  weaving  yarns  must  be 
distinguished  from  knitting  yarns.  Hosiery  yarns  often 
form  a  special  group  under  the  latter  category.  In  addi- 
tion, distinction  must  be  made  between  eastern  and  southern 
yarns.  In  general,  southern  weaving  yarns  alone  bear 
terms  of  3  per  cent  10  days  e.  o.  m.  Southern  knitting 
yarns  and  eastern  yarns,  both  weaving  and  knitting,  are 
sold  on  terms  of  2  per  cent  10  days  e.  o.  m.  or  2  per  cent  30 
days.  In  Philadelphia,  however,  a  special  arrangement 
prevails  calling  for  3  per  cent  30  days. 

'  Manufacturers  of  automobile  tires,  however,  offered  such  induce- 
ments in  1919-20  that  many  weaving  mills  fjave  o%'er  the  largest 
part  of  their  spinning  equipment  to  the  manufacture  of  tire  yarn 
and  went  out  in  the  market  to  buy  the  yarn  needed  for  their  owa 
cloths. 


TEXTILE  MANUFACTURING  INDUSTRIES    271 

These  terms  are,  however,  by  no  means  universally  em- 
ployed, and  many  variations  are  found.  Some  eastern 
manufacturers  have  terms  of  2  per  cent  10  days,  net  30 
days  or  60  days.  The  latter  terms  apply  more  frequently 
on  knitting  yarns.  Net  terms  are  more  largely  given  by 
middlemen  than  by  spinners,  especially  on  sales  to  smaller 
manufacturers  of  knit  goods,  who  buy  more  or  less  generally 
from  commission  houses.  Sweater  yarns  are  often  sold  on 
terms  of  net  10  days  e.  o.  m.,  but  in  some  cases  30  days  or 
occasionally  60  days  extra  may  be  given  with  a  cash  dis- 
count of  2  per  cent  10  days. 

One  southern  manufacturer  reports  an  effort,  after  the 
war  orders  were  over,  to  eliminate  the  discount  and  sell  for 
net  cash,  which  was  opposed  by  brokers  and  commission 
merchants,  who  forced  a  return  to  the  old  terms.  Another, 
however,  states  that  many  mills  have  succeeded  in  elim- 
inating the  discount. 

Collections  in  the  cotton-yarn  industry  in  general  are 
reported  prompt.  Several  manufacturers  report  them 
quicker  through  commission  houses  than  on  direct 
shipments. 

Ch'ey  Goods. — The  bulk  of  the  cotton  yarn  produced  is 
undyed,  and  is  made  up  first  into  grey  goods — that  is, 
undyed  and  unbleached  goods.  Part  of  these  goods  are 
to  be  used  in  the  grey  and  are  sold  to  the  jobber,  while  part 
are  sold  to  industrial  consumers,  such  as  manufacturers  of 
mechanical  rubber  goods  and  the  bag  trade.  The  bulk, 
however,  require  further  treatment.  They  are  then  printed, 
finished,  or  converted  either  by  the  cloth  manufacturer 
himself  or  by  the  merchant  converter.  The  latter  buys  grey 
goods,  has  a  professional  converter  convert  them  for  him, 
and  then  sells  the  finished  product  to  the  same  classes  of 
purchasers  as  does  the  cloth  manufacturer  who  does  his 
own  converting,  namely,  to  jobbers,  retailers,  and  the  cut- 
ting-up  trade.    It  is  estimated  that  roughly  25  per  cent 


272    THE  MECHANISM  OP  CX)MMERCIAL  CREDIT 

of  the  output  of  grey  cloth  is  finished  by  the  weaver,  and 
that  the  balance  is  finished  by  converters.* 

The  merchant  converter  buys  grey  goods  either  direct 
from  the  cloth  manufacturer  or  through  the  medium  of  a 
broker.  Fall  River  manufacturers  sell  their  product  almost 
entirely  through  brokers,  and  similarly  with  a  few  southern 
mills.  New  York  commission  houses,  it  is  estimated,  sell 
half  their  mills'  products  direct,  instead  of  through 
brokers.  It  is  stated  that  fine  goods,  novelties,  and  special 
cloths  are  handled  practically  entirely  by  brokers. 

The  distributive  methods,  of  course,  vary  with  the  type 
of  product.  Certain  goods  are  sold  to  the  industrial  con- 
sumer. It  has  been  estimated  that  of  the  total  output  of 
grey  goods,  10  per  cent  is  sold  to  jobbers,  who  either  convert 
the  goods  or  resell  them  to  retailers  for  use  in  the  grey, 
while  the  balance  is  sold  to  converters  and  printers  on  the 
one  hand  and  industrial  consumers  on  the  other  hand. 

Formerly  a  distinction  was  made  in  terms  between  print 
cloths  and  finer  goods,  which  were  generally  sold  on  terms 
of  net  10  days,  and  sheetings  and  coarser  goods,  which  (in 
the  case  of  materials  sold  to  jobbers  for  resale  in  the  grey) 
were  generally  sold  on  the  dry  goods  terms  of  2  per  cent 
10  days,  60  days  extra,^  or  3  per  cent  10  days,  and  (in  the 
case  of  heavy  cotton  goods  sold  to  industrial  consumers) 
on  terms  of  2  per  cent  10  days  (in  some  eases  2  per  cent 
10  days  e.  o.  m.) .  As  a  result  of  the  war,  and  in  connection 
with  price  fixing,  the  terms  on  coarser  goods  were  also 
reduced,  in  1917,  to  net  10  days,  and  the  New  York  freight 
allowance  formerly  given  by  southern  mills  was  eliminated. 
After  the  armistice,  however,  freight  concessions  were  again 
granted  by  some  mills,  in  addition  to  returning  in  certain 
cases  to  the  old  terms  of  2  per  cent  10  days,  60  days  extra. 

*  Gooda  coming  from  the  weaver  finished,  however,  are  largely 
colored  yarn  goods,  such  as  shirtings,  ginghams,  denims,  cheviots, 
and  tickings. 

•  These  terms  generally  apply  on  all  seconds  also. 


TEXTILE  MANUFACTURING  INDUSTRIES  273 

It  is  estimated,  however,  that,  due  to  the  heavy  demand  for 
goods,  75  per  cent  of  the  mills  were  able  to  continue  to  sell 
on  the  shorter  terms.  The  old  terms  are  again  used  in  the 
ease  of  certain  classes  of  grey  goods,  such  as  sheetings, 
due  to  competition.^  Present  terms  thus  are  in  general 
net  10  days,  while  in  some  cases  2  per  cent  10  days;  2  per 
cent  10  days  or  net  60  days ;  and  3  per  cent  10  days,  or  2 
per  cent  10  days  60  days  extra  are  given.  It  is  stated  that 
jobbers  generally  wish  to  be  quoted  the  last-named  terms. 

Finished  Cotton  Goods. — It  has  been  estimated  roughly 
that  upwards  of  50  per  cent  of  the  total  output  of  finished 
cotton  goods  is  sold  to  jobbers,  30  to  35  per  cent  to  the 
cutting-up  trade,  and  the  balance  to  retailers.  The  meth- 
ods of  distribution,  however,  vary  according  to  the 
particular  type  of  product  and  the  corresponding  type  of 
purchaser.  The  large  jobbers  do  some  converting  them- 
selves, more  particularly  of  the  cheaper  staples  than  of  the 
more  expensive  style  goods.  High-class  wash  goods,  75 
per  cent  of  which  go  to  the  consumer  over  the  counters  of 
the  stores  in  the  large  cities,  are  bought  direct  from  the 
converter,  while  cheap  calicos  or  percales,  of  which  prob- 
ably only  25  per  cent  are  distributed  through  the  retailer 
in  the  large  city,  are  sold  by  the  converter  to  the  jobber, 
who  in  turn  sells  them  to  the  merchant  in  the  smaller  town. 

Staples  must  be  distinguished  from  season  goods.  The 
former,  which  are  sold  all  the  year  round,  include  goods 
such  as  bleached  cottons,  bleached  cambrics,  and  bleached 
twills.  Linings  and  shirtings  are  generally  classed  as  staple 
goods,  although  they  may  be  sold  also  as  spring  or  fall 
goods,  according  to  the  character  of  the  particular  item. 

*Grey  goods  have  many  special  uses,  in  which  cases  terms  differ 
from  the  general  terms.  Grey  goods  used  for  house  linings  afford 
an  example.  These  are  sold  to  jobbers,  who  in  turn  sell  to  paper 
hangers.  Due  probably  to  the  length  of  time  required  in  building, 
they  are  again  sold  on  the  old  terms  of  2  per  cent  10  days,  60  days 
extra. 


274   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Dress  goods,  draperies,  percales,  and  cambrics  are  examples 
of  two  season  goods,  while  wash  goods  are  classed  as  spring 
goods,  and  blankets  and  (at  times)  flannels  as  fall  goods. 

Terms  on  finished  converted  or  bleached  goods  are  almost 
universally  2  per  cent  10  days,  60  days  extra  on  staples 
and  on  season  goods  between  seasons.  Season  datings  are 
April  1  and  October  1  and  apply  on  sales  to  both  jobbers 
and  retailers,  although  deliveries  to  retailers  are  made  con- 
siderably later  than  deliveries  to  jobbers.  Terms,  in 
general,  have  been  shortened.  Many  manufacturers  have 
succeeded  in  abolishing  season  datings,  although  several 
have  since  restored  them.  Anticipation  at  the  rate  of  6 
per  cent  per  annum  is  usually  permitted.  This  gives  a 
discount  of  3  per  cent  10  days,  which  at  times  is  quoted 
in  addition  to  the  regular  terms.  Poor  credit  risks  at  times 
are  quoted  only  3  per  cent  10  days,  or  3  per  cent  C.  0.  D. 
or  cash  before  delivery. 

Certain  types  of  products  at  times  bear  other  than  the 
regular  terms.  Occasionally  a  converter  will  give  4  months, 
irrespective  of  the  kind  of  goods  or  type  of  buyer.  Con- 
verters who  deviate  from  the  regular  terms  of  2  per  cent 
10  days,  60  days  extra,  often  have  no  permanent  discount 
terms,  but  vary  these  with  the  rise  and  fall  of  the  market. 
Little  use  is  reported  by  manufacturers  of  trade  accept- 
ances. 

Silk^  Yarns  and  Thread — Silk  yarns  are  of  two  kinds, 
spun  and  thrown.  The  former  is  a  thread  spun  from  short 
strands  of  silk  derived  from  waste  made  in  raw  silk  reeling 
establishments,  as  well  as  in  subsequent  handling  of  the 
thread  in  the  undyed  state,  and  from  pierced  cocoons 
(cocoons  from  which  the  moths,  reserved  for  breeding,  have 
emerged).  Thrown  silk  is  composed  of  several  strands  of 
the  silken  thread  as  it  is  reeled  directly  from  the  cocoon. 

'  Acknowledgment  is  due  Miss  M.  E.  Birmingham,  Assistant  Sec- 
retary, Silk  Association  of  America,  for  reading  this  section. 


TEXTILE  MANUFACTURING  INDUSTRIES    275 

Spun  silk  is  used  more  largely  for  weaving,  while  thrown 
is  used  in  the  manufacture  of  almost  all  classes  of  goods. 
It  is  roughly  estimated  that  at  the  present  time  about  10 
pounds  of  thrown  silk  are  used  to  one  pound  of  spun  silk. 
While  a  considerable  proportion  of  the  spun  silk  consumed 
in  this  country  is  still  imported  from  France,  Italy, 
Switzerland,  with  a  small  amount  from  Japan,  the  produc- 
tion of  American  mills  has  increased  largely  during  the 
past  10  years. 

Up  to  4  or  5  years  ago  it  was  rather  customary  to  give 
6  per  cent  10  days,  5  per  cent  30  days  ou  spun  silk,  e.  o.  m. 
terms  prevailing  in  some  cases.  The  terms  are  stated  to 
have  originated  with  one  of  the  larger  manufacturers, 
producing  a  great  quantity  of  silk  products,  when  they 
WTre  leaders  in  the  spun  silk  branch  of  the  industry.  With- 
in the  last  4  or  5  years,  however,  there  has  been  a  tendency 
to  shorten  terms  and  to  put  the  industry  on  practically 
a  10-day  cash  basis.  The  tendency  was  accentuated  by  the 
fact  that  the  manufacture  of  spun  silk  requires  considerable 
capital,  much  more  proportionately  than  for  weaving  or 
throwing. 

The  standard  trade  rules  recently  adopted  by  the  Spun 
Silk  Division  of  The  Silk  Association  of  America  specify 
that  the  selling  terms  shall  be  2  per  cent  10  days,  net  30 
days.  All  prices  are  f.  o.  b.  seller's  shipping  point.  Ac- 
counts shall  be  payable  free  of  exchange  in  United  States 
currency  or  its  equivalent. 

Thrown  silk  is  now  sold  largely  by  manufacturers  of 
this  product,  and  by  dealers,  to  weaving  and  knitting  mills. 
While  the  greater  portion  of  raw  silk  imports  are  still 
handled  by  the  manufacturers  of  silk  fabrics,  either  in 
their  own  throwing  mills  or  by  sending  to  commission 
throwsters,  the  selling  of  thrown  silk  has  grown  very  rap- 
idly during  the  past  10  years  and  is  expected  to  continue. 
Terms  of  sale  in  this  branch  of  the  industry  vary  somewhat, 


276    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

but  generally  are:  to  weavers  2  per  cent  10  days,  net  3 
months'  trade  acceptance;  to  knitters  2  per  cent  10  days, 
net  e.  o.  m.  In  some  cases  open  accounts  are  carried  for  60 
or  90  days. 

Sewing  silk,  silk  twists  and  embroidery  silks  are  produced 
in  general  by  mills  specializing  in  these  products.  The 
terms  which  are  almost  universally  employed  by  these 
"small  goods"  manufacturers  are  2  per  cent  10  days 
e.  o.  m.,  net  30  days. 

Broad  Silks  and  Bihhons. — Woven  silks  fall  into  two 
general  classes:    broad  silks  and  ribbons. 

Of  broad  silks  it  is  estimated  for  the  year  1919  that 
about  60  per  cent  of  the  total  output  were  grege  goods 
(woven  before  dyed),  40  per  cent  skein  dyed  (dyed  before 
woven).  Grege  goods  represent  such  fabrics  as  wash 
crepes,  georgettes,  crepe  de  chines,  meteors;  foulards  and 
radiums ;  shirtings ;  spun  silk  and  cotton-filled  satins ;  arti- 
ficial silk-mixed  goods;  chiffons;  cottoii  and  wool-filled 
poplins;  taffetalines.  Skein-dyed  goods  represent  such 
fabrics  as  taffetas,  peau  de  cygnes,  messalines,  and  fancies ; 
also  tie  silks,  inclusive  of  Jacquards;  and  men's  wear, 
upholstery,  and  umbrella-silks.  Grege  goods  are  freely 
sold  through  converters,  while  skein-dyed  goods  are  largely 
marketed  by  the  manufacturer.  Converters  financially 
able  to  do  so,  buy  grege  goods  in  the  raw  direct  from  the 
mill  without  intermediate  banking  or  commission  facilities 
on  terms  of  net  10  days  or  net  10  days  e.  o.  m. 

It  has  been  estimated  that  about  30  to  35  per  cent  of 
the  output  of  the  silk  fabrics  industr}^  is  sold  by  manufac- 
turers to  the  cutting-up  trade,  25  per  cent  to  the  wholesale 
dry  goods  trade,  and  40  per  cent  to  retailers.  Jobbing  in- 
creased materially  during  the  war,  as  in  other  branches  of 
the  textile  industry,  although  there  is  a  tendency  noticeable 
now  to  curtail  this  business  in  view  of  the  unreliability  of 
many  of  the  smaller  and  newer  jobbing  houses.     Probably 


TEXTILE  MANUFACTURING  INDUSTRIES   277 

40  per  cent  of  all  dress  silks  (inclusive  of  linings  for 
women's  clothes)  goes  to  garment  manufacturers  (cutters- 
up),  while  about  75  per  cent  of  all  men's  lining  silks  goes 
direct  to  the  men's  clothing  manufacturers. 

Of  ribbons,  probably  7  1/2  per  cent  goes  to  the  cutting- 
up  trade,  22  1/2  per  cent  to  the  wholesaler,  and  70  per 
cent  to  the  retailer.  The  proportion  sold  to  each  of  the 
three  classes  of  purchasers,  of  course,  varies  from  year  to 
year  with  the  trend  of  fashion.  Thus  the  percentage  of  rib- 
bons sold  to  the  cutting-up  trade  increased  in  1919,  due  to 
the  increased  use  of  the  product  in  tlie  trimming  of 
dresses. 

In  June,  1912,  and  by  revision  in  December,  1920,  the 
Broad  Silk  Manufacturers  Division  of  The  Silk  Association 
of  America  adopted  a  set  of  "rules  to  govern  transactions 
between  buyers  and  sellers  of  broad  silks,"  to  apply  to 
cases  not  covered  by  specific  contracts.  The  rules  include 
the  subject  of  terms,  and  recognize  existing  practice.  The 
terms  specified  are  6  per  cent  10  days,  60  days'  dating, 
and  the  privilege  is  given  to  buyer  of  anticipating  payment 
at  the  rate  of  6  per  cent  per  annum.  Overdue  bills  are 
payable  upon  the  basis  of  a  reduction  in  the  discount  rate 
of  1  per  cent  for  each  30  days  or  fraction  thereof  overdue, 
and  after  net  due  date  are  subject  to  an  interest  charge  of 
6  per  cent  per  annum.  The  terms,  however,  vary  according 
to  the  responsibility  of  the  purchaser,  some  buyers  buying 
on  30  days  with  discount  of  5  per  cent,  others  on  10 
days,  with  discount  of  7  per  cent,  and  still  others  net 
cash,  with  discount  of  8  per  cent.  Certain  variations, 
of  course,  occur,  such  as  the  giving  of  a  season's  dating 
on  sample  pieces,  a  practice,  however,  which  has  in  part 
disappeared. 

Japanese  goods,  as  well  as  domestic  shirtings  converted, 
are  generally  sold  on  a  3  per  cent  10  days,  or  2  per  cent 
10  days,  60  days'  dating  basis.     Men's  lining  silks  prior 


278    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

to  the  war  were  sold  to  clothing  manufacturers  largely  on 
the  basis  of  7  per  cent  4  months'  dating,  or  10  per  cent  10 
days,  which  terms  were  identical  with  those  of  the  woolen 
manufacturers.  About  4  years  ago  a  number  of  specialists 
in  these  lining  silks  instituted  the  change  to  2  per  cent  10 
days,  60  days'  dating,  which  terms  are  now  generally 
observed. 

The  trade  acceptance  is  far  from  being  generally  used  in 
the  industry.  While  some  firms  are  said  to  insist  upon 
trade  acceptances  in  all  transactions,  other  manufacturers 
do  not  employ  them  at  all.  In  normal  times  collections  by 
tlie  larger  houses  are  made  promptly  within  70  days  from 
date  of  invoice. 

In  October,  1912,  the  Ribbon  Manufacturers  Division 
of  The  Silk  Association  of  America  adopted  rules  covering 
the  ribbon  industry.  The  terms  specified  were  6  per  cent 
10  days,  60  days'  dating,  with  anticipation  permitted  at  the 
rate  of  6  per  cent  per  annum.  This  gives  a  discount  of  7 
per  cent  10  days,  which  in  fact  is  specified  in  certain  cases, 
such  as  for  the  smaller  trade.  Bills  to  the  cutting-up  trade, 
and  to  some  department  stores,  are  payable  on  the  10th  of 
the  month  less  7  per  cent.  These  terms  were  in  general 
use  prior  to  their  formal  adoption.  Six  or  7  years  ago  the 
millinery  trade  received  a  season  dating  of  April  15  and 
October  15,  on  December  1  to  February  1  shipments  and 
June  1  to  August  1  shipments  respectively.  Since  that 
time  the  dating  has  been  advanced  to  April  1  and  October 
1,  and  at  the  present  time,  this  season  dating  is  granted  to 
larger  houses  only.  Terms  to  the  smaller  houses,  as  well 
as  for  shipments  after  the  dates  given  above,  bear  the  regu- 
lar terms  of  6  per  cent  10  days,  60  days'  dating.  Strictly 
millinery  houses,  in  some  cases,  have  obtained  this  season 
dating  on  other  classes  of  goods  also  and  the  dating  is  often 
used  with  wholesale  dry  goods  houses.  It  is  stated  that  the 
use  of  the  trade  acceptance  in  the  silk  ribbon  industry  is 


TEXTILE  MANUFACTURING  INDUSTRIES   279 

regarded  as  impracticable,  especially  for  the  local  trade, 
due  to  the  small  size  of  orders. 

Woolen  and  Worsted  Yarns.^ — Several  estimates  place 
the  percentage  of  yarns  sold  through  agents  representing 
the  mills,  usually  several  at  one  time,  as  from  70  to  75 
per  cent,  the  balance  being  marketed  direct  from  the  spin- 
ner. A  certain  amount  of  worsted  knitting  yarns  is  stated, 
however,  to  be  handled  by  jobbers  who  deal  out  small 
quantities  from  time  to  time  to  small  knitters  with  a  few 
machines.  A  government  survey  made  in  August,  1918, 
showed  that  86.5  per  cent  of  the  woolen  yarn  produced 
was  used  in  the  plants  of  the  spinner,  while  of  worsted 
yarn  produced  under  the  Bradford  system  56  per  cent,  and 
of  worsted  yarn  produced  under  the  French  system  only 
28  per  cent  was  so  used.  The  percentages  of  the  output 
sold  were  thus,  respectively,  13.5,  44,  and  72.  The  total 
output  of  each  class  was,  respectively,  8,233,000,  3,349,000, 
and  1,048,000  pounds.  The  proportion  of  their  yarns  which 
manufacturers  purchase  differs  also  according  to  the  type 
of  product,  whether  knit  goods  or  men's  or  women's  wear. 
It  has  been  stated  that  knitting  mills  buy  all  their  worsted 
yarn  and  approximately  80  per  cent  of  their  woolen  yarn. 
"Weavers  of  men's  wear  buy  approximately  40  per  cent  of 
their  worsted  yam  and  15  per  cent  of  their  woolen  yarn, 
while  weavers  of  dress  goods  buy  approximately  60  per  cent 
of  their  worsted  yarn  and  90  per  cent  of  their  woolen  yarn. 

Terms  vary  somewhat.  The  regular  terms  on  both 
classes  of  yarns  are  2  per  cent  10  days,  net  60  days,  but 
some  manufacturers  give  a  discount  of  only  1  per  cent. 
Two  per  cent  10  days  e.  o.  m,  has  become  quite  a  general 
practice,  in  particular  for  the  underwear  and  hosiery  trade. 
The  men's  wear  trade  generally  receives  the  regular  terms, 
while    sweater    manufacturers   endeavor   to    purchase    on 

•  Acknowledgment  is  due  Mr.  Melbourne  Smith,  Managing  Editor, 
Daily  News  Eecord,  for  reading  thia  section. 


280   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

terms  of  2  per  cent  10  days,  60  days  extra,  which  extreme 
terms  are  given  on  shipments  to  some  western  knitters. 
The  sweater  manufacturers'  association  passed  a  resolu- 
tion, in  1920,  in  favor  of  such  terms.  The  spinners' 
association  has  opposed  granting  them,  and  endeavored 
during  the  war  to  standardize  terms  on  all  classes  of  yarns 
at  2  per  cent  10  days.  It  was  found,  however,  that  tradi- 
tionally different  classes  of  purchasers  had  always  had 
different  terms,  and  certain  factors  were  not  in  sympathy 
with  the  effort.  On  the  whole  there  have  been  no  ma- 
terial changes  in  terms  during  the  last  decade.  Collec- 
tions are  stated  to  have  been  more  prompt  than  for- 
merly, and  a  greater  percentage  of  manufacturers  take 
the  discount,  although  the  sweater  trade  tends  to  be  some- 
what slow. 

Piece  Goods. — These  products  are  divided  into  two 
principal  classes:  men's  wear  and  women's  wear.  More 
women's  wear  passes  through  commission  houses  than 
is  the  case  in  men's  wear,  but  both  classes  are  sold  more 
largely  at  the  present  time  through  mill  agencies  than 
through  commission  houses.  Few  of  the  old  line  commission 
houses  remain,  most  of  the  so-called  commission  houses  own- 
ing their  own  mills.  Sales  are  made  to  two  classes  of 
purchasers:  the  cutting-up  trade  and  the  over-the-counter 
trade.  The  former  is  typified  by  the  clothing  manufacturer, 
the  latter  by  the  jobber  and  retailer.  The  proportion,  in 
particular  in  women 's  wear,  which  is  sold  to  the  two  differ- 
ent types  varies  according  to  the  current  style.  Thus  the 
prevalence  of  soft-draped  effects  increases  the  over-the- 
counter  trade,  while  the  prevalence  of  close-fitted  styles  in- 
creases the  ready-to-wear  business  and  thus  the  proportion 
of  the  output  sold  to  the  cutting-up  trade.  Jobbing  in- 
creased greatly  during  the  war  period,  due  to  the  scarcity 
of  goods.  The  jobber  not  only  figured  as  a  regular  link  in 
the  distributive  chain  between  manufacturer  and  retailer  or 


TEXTILE  MANUFACTURING  INDUSTRIES    281 

tailor,  but  also  in  a  trading  capacity,  and  the  same  piece  of 
goods  frequently  changed  hands  5  or  6  times  before  passing 
into  actual  consumption.  The  industry  is  distinctly  season- 
al, and  men's  wear  lines  generally  open  in  January  to  Feb- 
ruary for  heavy-weight  fabrics  and  July  to  August  for  light 
weights.  Large  manufacturers  of  staples  and  semi-staple 
dress  goods  generally  open  a  month  or  so  later,  and  a  num- 
ber of  small  manufacturers  of  fancies  open  their  lines  no 
earlier  than  do  the  jobbers,  namely,  2  or  3  months  after 
manufacturers'  openings.  "Hand-to-mouth"  buying  pre- 
vails to  a  larger  extent  on  women's  Avear,  due  to  greater 
style  risk. 

It  is  stated  by  one  authority  that,  prior  to  about  1893, 
the  terms  were  uniformly  10  per  cent  10  days,  9  per  cent 
30  days,  8  per  cent  60  days,  or  7  per  cent  4  months,  with 
season  datings  of  June  30  and  December  31,  Whereas  pre- 
viously practically  all  woolen  goods  had  been  distributed 
through  the  old-fashioned  commission  houses,  in  that  year 
the  present  system  of  separating  the  merchandising  and 
financial  ends  of  the  distribution  of  Avoolens  began,  and  the 
largest  of  the  old  commission  houses  gradually  dropped  the 
merchandise  end  of  the  business  and  confined  themselves 
to  acting  as  factors.  At  the  same  time  gradual  shortening 
of  the  long  dating  originally  given  by  the  old  commission 
houses  was  taking  place.  Little  agreement,  however,  exists 
as  to  the  details  of  this  movement,  but  the  change  is  said 
to  have  been  particularly  marked  about  1912.  At  that  time 
there  was  a  movement  of  manufacturers  away  from  com- 
mission houses,  and  these  mills  in  large  part  employed  terms 
of  net  30  days.  Other  manufacturers,  however,  continued 
to  employ  the  regular  terms  of  7  per  cent  4  months  in 
general,  with  optional  discounts  of  10  per  cent  30  days  and 
to  a  lesser  extent  8  per  cent  60  days  or  90  days,  and  with 
season  datings,  such  as  May  1  and  November  1,  June  1  and 
December  1,  or  January  1  and  July  1.    The  season  dating, 


282   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

it  should  be  noted,  however,  does  not  lengthen  the  terms 
as  much  as  may  appear  at  first  sight,  for  deliveries  are  not 
made  immediately  after  the  mill's  selling  season,  but  rather 
adjusted  to  the  buyer 's  needs,  and  thus  January  sales  may 
only  be  delivered  in  June  and  July  sales  in  December.  An- 
ticipation is  generally  permitted  at  the  rate  of  6  per  cent 
per  annum.  Many  manufacturers,  however,  gave  no  dating, 
and  sold  upon  straight  terms  of  7  per  cent  4  months,  while 
other  houses  sold  on  terms  of  10  per  cent  30  days,  often 
granting  e.  o.  m.  terms.  During  the  war  there  was  consid- 
erable shortening  of  terms  as  a  result  of  the  existence  of 
a  seller's  market,  so  that,  after  1917,  the  dating  was  fre- 
quently eliminated  and  terms  shortened  in  many  cases  to 
net  10  days  or  net  30  days.  Since  1920,  however,  there 
has  been  a  change  in  the  situation,  as  a  result  of  the  lessened 
demand  for  goods,  and  a  tendency  to  revert  to  the  older 
terms. 

Difference  of  opinion  exists  as  to  the  relative  length  of 
terms  on  men 's  wear  and  women 's  wear  goods.  While  many 
mills  make  no  distinction  in  their  terms  on  the  two  classes 
of  goods,  several  authorities  agree  that  women's  wear  terms 
have  never  been  as  short  as  terms  on  men 's  wear,  although 
one  states  that  they  are  gradually  becoming  the  same. 
Many  of  the  larger  manufacturers  still  retain  the  regular 
terms  of  7  per  cent  4  months  with  season  dating  on  women's 
wear,  while  several  large  houses  give  10  per  cent  30  days, 
with  semi-annual  dating.  It  is  stated  that  the  latter  terras 
apply  to  the  majority  of  carded  woolens  sold  by  the  larger 
organizations  for  women's  wear,  while  worsted  fabrics  are 
sold  on  terms  of  7  per  cent  10  days,  60  days  extra,  or  2  per 
cent  10  days,  60  days  extra,  in  some  cases  with  semi-annual 
dating.  This  distinction  in  terms  is  found  only  in  the  case 
of  women's  wear.  Men's  wear,  in  addition  to  being  sold  on 
the  regular  terms,  with  or  without  season  dating,  in  many 
cases  bears  shorter  terms,  such  as  10  per  cent  10  days,  net 


TEXTILE  MANUFACTURING  INDUSTRIES    283 

30  days,  net  30  days  e.  o.  m,,  or  infrequently  2  per  cent  10 
days,  60  days  extra. 

Certain  mills  making  high-grade  goods  employ  these 
shorter  terms,  and  it  has  been  suggested  in  explanation  of 
their  use  that  such  mills  were  in  a  particularly  favorable 
position  to  select  and  be  certain  of  their  customers,  although 
the  terms  have  been  employed  for  medium  and  low-grade 
goods  also.  The  difference  between  mills  employing  30-day 
and  those  employing  4-month  terms  is  perhaps  to  be 
ascribed  rather  to  the  size  of  the  mill  or  output  handled  by 
the  selling  organization,  and  the  corresponding  number  of 
accounts  which  must  be  sold  to  take  the  product.  On  the 
other  hand,  shorter  terms  in  the  case  of  smaller  mills 
may  be  due  in  some  cases  also  to  lack  of  ability  to 
finance  business  on  the  regular  basis.  It  should  be 
noted  that  for  the  large  mills  which  continue  to  adhere 
to  the  regular  terms,  the  shortening  of  terras  during  the 
war  was  reflected  in  the  greater  proportion  of  their  ac- 
counts which  paid  on  shorter  time  instead  of  taking  the 
full  4  months. 

Although  the  regular  terms  are  10  per  cent  30  days,  8 
per  cent  60  or  90  days,  and  7  per  cent  4  months,  it  is  stated 
that  in  ordinary  times  the  grading  of  terms  is  not  permitted, 
and  only  substantial  buyers  have  insisted  upon  optional 
terms,  these  buyers  invariably  taking  advantage  of  the 
shorter  time  in  order  to  secure  the  discount.  The  propor- 
tion of  accounts  taking  the  higher  discounts  of  course  varies 
with  the  level  of  interest  rates,  anticipation  being  less 
frequent  when  interest  rates  are  high.  This  was  noticeable 
about  1919.  Terms  are  also  adjusted  to  accord  with  the 
way  in  which  payments  are  coming  in  to  the  buyer  from  his 
trade.  On  the  other  hand,  owing  to  the  difference  in  the 
credit  risk,  as  in  the  case  of  the  other  textiles,  some  buyers 
will  only  be  sold  upon  terms  of  70  days,  others  upon  terms 
of  40  days,  etc. 


284  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Blankets^ — Unlike  the  men's  wear  and  dress  goods 
branches  of  the  industry,  which  are  largely  concentrated 
in  certain  of  the  New  England  and  Middle  Atlantic  States, 
there  are  a  large  number  of  small  blanket  mills  widely  scat- 
tered throughout  the  country,  catering  to  the  local  trade. 
Most  woolen  blankets  are  sold  through  commission  houses 
or  agents,  although  a  certain  number  of  mills  throughout 
the  country  sell  direct.  The  latter  practice  is  stated  to  be 
more  common  among  smaller  mills  making  low  and  medium 
grades  of  wool  and  wool-mixed  blankets,  and  among  mills 
in  western  Pennsylvania,  in  the  South,  and  in  the  Middle 
West,  than  among  eastern  mills.  It  is  estimated  that  per- 
haps half  of  the  output  passes  through  the  hands  of 
jobbers. 

Sales  to  the  retail  trade  are  generally  made  on  terms  of 
2  per  cent  10  days,  60  days  extra.  To  the  jobbing  trade  they 
are  sold  for  delivery,  usually  in  June,  July  and  August,  on 
terms  of  2  per  cent  10  days,  October  1.  In  many  cases  sales 
direct  to  the  retailer  by  the  manufacturer  also  bear  a  dating. 
Occasionally  3  per  cent  10  days  is  granted,  but  only  for 
a  special  purpose.  Prior  to  about  1917,  the  customary  dat- 
ing to  jobbers  was  November  1,  at  which  time  it  was 
changed  to  October  1.  Collections  during  the  period  of 
great  activity  were  extraordinarily  good,  but  have  been 
poor  as  business  conditions  have  changed,  and  many  ac- 
counts which  had  always  previously  paid  promptly  have 
been  running  somewhat  behind. 

Floor  Coverings}^ — Carpets  and  rugs  are  sold  by 
manufacturers  direct  through  their  selling  offices  located 
in  New  York,  or  are  sold  through  selling  agents,  one  agent 
in  several  cases  having  the  sale  of  3  or  4  leading  lines.    It 

'Acknowledgment  is  due  Mr.  F.  H.  Cabot,  President,  F.  H.  Cabot 
and   Co.,   Inc.,   New   York,   for   reading  this   material. 

**  Acknowledgment  is  due  Mr.  Thos.  A.  Fernley,  Secretary-Treas- 
urer, National  Wholesale  Floor  Covering  Association,  for  reading  this 
material. 


TEXTILE  MANUFACTURING  INDUSTRIES    285 

is  estimated  that  about  two-thirds  of  the  output  is  sold 
to  wholesale  distributors  and  one-third  to  department 
stores  and  other  retailers.  The  policies  of  individual  man- 
ufacturers, of  course,  differ.  The  business  is  seasonal,  and 
seasons  open  about  April  1  or  May  1  and  October  1  or 
November  1, 

Prior  to  about  1916,  terms  were  generally  4  per  cent 
10  days,  with  March  1  and  September  1  season  datings,  al- 
though in  some  cases  dates  as  late  as  May  1  and  October  1 
were  specified.  Shipments  during  the  season — that  is,  from 
about  March  1  to  May  1,  and  from  September  1  to  Novem- 
ber 1 — bore  terms  of  4  per  cent  10  days.  About  that  time 
there  was  a  general  movement  to  make  terms  more  uniform 
and  shorter,  and  most  manufacturers  now  have  terms  of 
4  per  cent  10  days,  60  days  extra.  Net  terms  in  certain 
cases  are  90  days  or  4  months  from  date  of  shipment.  Some 
manufacturers,  however,  continue  to  give  a  season  dating, 
while  others  may  vary  the  terms  somewhat,  as,  for  example, 
4  per  cent  30  days.  On  goods  specially  made  to  order,  a 
considerable  amount  of  which  are  sold  through  interior 
decorators,  different  terms  are  employed,  4  per  cent  10  days, 
net  60  days,  for  example,  being  given.  Collections  in  the 
industr_y  are  reported  prompt  wholesalers  at  least  usually 
discounting  their  bills,  although  on  special  orders  many 
bills  run  to  maturity  instead.  The  terms  on  carpets  and 
rugs,  as  well  as  the  usual  methods  of  distribution,  apply 
in  general  in  the  case  of  linoleum  also. 

Hosiery.^^ — The  two  principal  classes  of  hosiery  are 
seamless  and  full-fashioned  hosiery,  which  is  knitted  on  a 
flat  frame  in  the  correct  dimensions  and  then  knitted  to- 
gether, A  negligible  quantity  of  cut-up  hosiery  is  also 
produced,  which  is  knitted  in  large  areas,  cut  up  and  sewed 

*"  Acknowledgment  is  due  Mr.  E.  L.  P.  R^-if sneider,  of  the  National 
Association  of  Hosiery  and  Underwear  Manufacturers,  for  reading 
this   section. 


286   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

together.  It  was  estimated  in  1915  that  90  per  cent  of  the 
total  output  consisted  of  seamless  hosiery.^^  There  has 
been  a  change  in  the  character  of  the  material  employed. 
Thirty-five  years  ago  woolen  and  merino  hosiery  was  in 
universal  use,  but  has  been  superseded  by  cotton,  which 
now  forms  the  bulk  of  the  output.  The  output  of  silk 
hosiery,  however,  is  increasing  greatly.  Formerly  hosiery 
manufacturers  sold  entirely  to  jobbing  houses,  and  at  pres- 
ent the  greater  part  of  the  output  is  still  distributed 
through  that  channel.  Data  obtained  in  1915  in  the  above 
study  from  73  mills  showed  that  a  little  more  than  50  per 
cent  of  the  total  output  was  sold  to  jobbers,  slightly  less 
than  5  per  cent  through  commission  houses,  and  slightly 
less  than  45  per  cent  to  retailers,  the  quantity  manufac- 
tured for  export  being  negligible.  Estimates  received  from 
various  authorities,  however,  place  the  percentage  of  direct 
sales  to  retailers  considerably  lower,  in  general  at  from 
20  to  35  per  cent  of  the  output.  The  present  tendency 
toward  sales  direct  to  the  retailer  is  found  mostly  among 
manufacturers  of  silk  hosiery,  most  of  whom,  however,  also 
produce  other  types,  notably  mercerized  and  fine-gauge 
cotton  goods.  This  tendency  is  also  found  particularly  in 
the  West,  where  the  greater  part  of  the  business  is  stated 
to  be  so  done.  In  the  East  and  South,  however,  manufac- 
turers still  depend  principally  upon  the  jobber  or  commis- 
sion house  as  a  means  of  distribution. 

It  is  stated  that  15  to  20  years  ago  many  manufacturers 
sold  upon  what  was  termed  a  regular  basis,  namely  6  per 
cent  10  days,  60  days  extra.  At  present,  however,  there 
appears  to  be  little  standardization  in  terms  of  sale  in  the 
industry,  although  the  National  Association  of  Hosiery  and 
Underwear  Manufacturers  "has  consistently  advocated 
selling  terms  of  30  days  net."    Each  manufacturer  in  large 

"  United  States  Bureau  of  Foreign  and  Domestic  Commerce,  Mis- 
cellaneous Series  No.  31. 


TEXTILE  MANUFACTURING  INDUSTRIES    287 

measure  has  his  own  terms,  which  he  applies  alike  to  his 
entire  product,  in  general  making  no  distinction  between 
the  various  kinds  of  hosiery. 

At  the  one  extreme,  a  few  manufacturers  adhere  to  terms 
of  net  10  days.  Some  quote  terms  of  net  30  days,  which  it 
is  said  were  established  several  years  ago  by  a  considerable 
number  of  manufacturers  of  silk  hosiery,  who  were  aided 
in  enforcing  these  terms  by  the  scarcity  of  such  goods,  as 
against  low-end  hosiery,  in  which  a  surplus  existed  in  1919, 
Some  manufacturers  quote  2  per  cent  10  days,  30  days 
extra,  which  terms,  it  has  been  stated,  have  tended  to  be 
generally  changed  by  the  cotton  hosiery  manufacturers 
employing  them  to  net  30  days.  A  comparatively  small 
number  of  manufacturers  quote  2  per  cent  10  days,  60  days 
extra.  The  jobbers  desire  such  terms,  and  the  southern 
jobbers  in  addition  recently  requested  a  dating  of  April  1 
for  spring  goods  and  October  1  for  fall  goods.  Jobbers 
in  certain  cases  have  received  season  datings,  but  they 
have  not  generally  been  given  to  retailers.  The  latter, 
however,  have  been  granted  e.  o.  m.  terms  in  some  cases. 
Pacific  Coast  and  southern  purchasers  have  often  received 
30  days  additional  time.  In  highly  competitive  markets 
such  as  New  York  City,  Chicago,  and  Cleveland,  this  added 
time  may  likeAvise  be  granted.  The  trade  acceptance  is 
stated  to  be  little  used  in  the  industry. 

Knit  Underwear.^^ — The  two  principal  classes  of  under- 
wear are  full  fashioned,  which  is  rather  costly  and  is  used 
mostly  for  infant's  wear,  and  seamless,  of  which  the  bulk 
of  the  output  consists.  Cotton  is  the  principal  material, 
although  knit  underwear  is  also  made  of  wool,  merino,  and 
silk.  The  output  of  cloth  underwear  is  stated  to  be  increas- 
ing more  rapidly  than  the  output  of  knit  underwear. 

It  was  estimated,  in  1915,  that  55  per  cent  of  the  total 

"Acknowledgment  is  due  Mr,  Roy  A.  Cheney,  Secretary,  Knit 
Goods  Manufacturers  of  America,  for  reading  this  section. 


288  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

output  is  sold  by  manufacturers  to  jobbers,  15  per  cent 
through  commission  houses,  6  per  cent  through  commission 
agents,  and  23  per  cent  to  retailers,  the  quantity  manufac- 
tured for  export  being  negligible.  Statements  received 
from  various  authorities,  however,  lead  to  the  belief  that  the 
percentage  sold  to  jobbers  is  now  perhaps  considerably 
higher. 

Several  years  ago  terms  of  sale  were  largely  7  per  cent 
10  days  and  6  per  cent  10  days,  with  season  datings  of  May 
1  and  November  1  for  shipments  from  about  February  and 
July  on,  respectively.  Sales  in  season  carried  60  days 
extra.  At  present,  however,  little  uniformity  exists.  The 
season  dating  has  in  large  part  been  eliminated,  and,  as  in 
the  case  of  hosiery,  the  high  discounts  have  given  way  to 
smaller  ones  or  to  net  terms.  Distinction  is  generally  made 
between  terms  to  retailers  and  terms  to  jobbers.  The  for- 
mer usually  receive  cash  discounts,  whereas  in  the  case  of 
the  latter,  terms  are  frequently  net,  while  in  some  cases 
a  higher  cash  discount  is  given  the  retailer.  The  explana- 
tion is  perhaps  found  in  the  statement  that  collections  from 
retailers  are  not  as  prompt.  Terms  to  jobbers  are  generally 
also  much  shorter  than  to  retailers.  A  further  distinction 
is  made  at  times  between  heavj''  and  light  weight  garments. 

Present  terms  are  net  in  some  cases,  calling  for  net  30 
or  60  days  or  net  10  days,  60  days  extra,  at  times  with  sea- 
son dating.  Discounts  in  general  are  small  and  are  1  or  2 
per  cent  with  net  terms  of  30  or  60  days.  In  some  cases 
these  discounts  are  given  wdth  30  or  60  days  extra,  making 
the  bill  subject  to  discount  if  paid  in  40  or  70  days 
respectively. 

Laces  and  Embroideries.^* — Aside  from  their  sales  to 
garment  manufacturers,  importers  and  manufacturers  of 
lace  and  embroidery  sell  both  to  jobbers  and  to  retailers. 

"Acknowledgment  is  due  Mr.  David  E.  Golieb,  Credit  Manager, 
ELnatein -Wolff  Co.,  New  York,  for  reading  this  section. 


TEXTILE  MANUFACTURING  INDUSTRIES    289 

Many  houses  sell  only  to  manufacturers  and  retailers,  and 
it  is  stated  that  the  houses  which  also  sell  the  jobber  are 
generally  better  equipped  to  sell  to  the  jobber  and  manu- 
facturer of  low-end  garments.  The  jobbers  import  direct 
to  a  considerable  extent,  and  the  number  of  houses  doing 
purely  a  jobbing  business  is  small.  The  heaviest  shipments 
to  jobbers  are  in  November  and  December,  purchases  being 
made  in  advance  at  a  desired  dating.  Retailers'  orders  are 
spread  more  evenly  over  the  year. 

Up  to  6  or  7  years  ago  there  were  a  variety  of  terms. 
Stock  business  generally  bore  the  regular  terms  of  7  per 
cent  10  days,  60  days  extra,  while  goods  tq  be  manufactured 
or  imported  articles  carried  au  extra  dating.  September 
to  December  deliveries,  for  example,  had  a  due  date  of  April 
1  to  June  1.  At  that  time  a  resolution  was  passed  by  the 
Lace  and  Embroidery  Association  fixing  a  maximum  dating 
of  4  months  on  imported  and  manufactured  articles.  These 
terms  were  not,  however,  lived  up  to,  and  in  consequence 
the  resolution  was  rescinded.  With  the  advent  of  the  war, 
a  resolution  was  passed  fixing  the  maximum  dating  at  70 
days,  and  eliminating  e.  o,  m.  terms.  This  was  in  force 
only  6  or  7  months,  as  many  houses  did  not  subscribe,  and 
the  prohibition  of  e.  o.  m.  terms  was  not  observed. 

At  the  present  time  many  importers  and  manufacturers 
employ  the  regular  terms  of  7  per  cent  10  days,  60  days 
extra.  Anticipation  at  the  rate  of  6  per  cent  per  annum 
is  permitted  (on  the  net  amount),  while  8  per  cent  (on  the 
gross  amount)  is  given  for  payment  within  10  days. 
E.  0.  m.  terms  are  given  at  times,  while  on  shipments  for 
the  opening  of  the  season  a  dating  of  30  days  or  more  is 
still  found  in  rare  cases — a  heritage  from  the  past.  Certain 
houses  on  the  Pacific  Coast  receive  terms  of  8  per  cent  on 
receipt  of  goods,  but  this  is  rare.  Terms  of  net  30  days 
prevail  for  manufacture  on  the  material  of  the  customer. 

During"  the  last  few  years  many  lace  and  embroidery 


290   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

houses  have  added  white  goods,  although  the  total  amount 
distributed  through  them  is  small  in  comparison  with  that 
handled  through  the  regular  channels.  These  goods  bear 
terms  of  2  per  cent  10  days,  net  60  days,  or  2  per  cent  10 
days,  60  days  extra.  Certain  houses  allow  a  season  dating 
of  April  1.  Some  houses  eliminated  the  discount  several 
years  ago,  making  the  terms  net  60  days,  with  anticipation 
at  the  rate  of  6  per  cent  per  annum.  Some  of  these  goods 
formerly  bore  terms  of  7  per  cent  10  days. 

Terms  are  now  generally  well  observed,  although  there 
is  the  usual  small  percentage  of  accounts  which  are  slow 
pay.  Only  a  negligible  percentage  of  accounts  require 
other  than  the  usual  routine  attention  for  collection.  Col- 
lections during  the  last  few  years  have  shown  considerable 
improvement. 

The  terms  of  the  smaller  domestic  embroidery  houses 
vary  greatly,  and  the  matter  is  largely  a  price  problem. 
They  are,  however,  generally  short,  as  such  houses  have 
little  cash,  and  8  per  cent  10  days  or  10  per  cent  10  days 
may  be  given. 

Wholesale  Dry  Goods.^^ — Dry  goods  jobbing  is  exceed- 
ingly complex.  Many  different  classes  of  goods  are  handled, 
and  the  business  of  individual  jobbers  differs  somewhat. 
Houses  are  of  several  types.  (1)  There  are  the  large 
nation-wide  general  dry  goods  jobbers,  located  in  the  larger 
markets,  in  particular  in  Chicago  and  St.  Louis  and  in  the 
Mississippi  Valley,  who  cater  to  buyers  throughout  the 
entire  country.  Larger  stocks  are  carried,  with  greater 
range  in  quality  and  selection,  and  the  volume  of  business 
done  enables  them  to  conduct  practically  a  specialty  busi- 
ness in  each  department.  A  large  mill  shipment  business 
is  also  done,  shipments  being  made  direct  from  mill  to 

"  Acknowledgment  is  due  Mr.  Thos.  A.  Fernley,  Secretary-Treas- 
urer, National  Wholesale  Dry  Goods  AssociatioHj  for  reading  this 
section. 


TEXTILE  MANUFACTURING  INDUSTRIES    291 

retailer.  (2)  There  are  local  general  jobbers,  located  in 
important  railroad  centers,  and  covering  a  more  limited 
territory.  They  are  found  in  the  upper  Mississippi  Valley, 
the  central  South,  and  on  the  Pacific  Coast,  though  rarely 
in  the  territory  accessible  to  New  York,  (3)  There  are 
smaller  local  jobbers,  covering  a  more  restricted  territory, 
and  found  to  a  considerable  extent  in  the  South.  The  dif- 
ferences between  the  three  types  are  largely  in  the  extent  of 
territory  covered.  In  (2)  and  (3),  however,  certain  differ- 
ences may  also  appear  according  to  the  territory  in  which 
the  house  is  located,  and  a  corresponding  difference  in  the 
character  of  goods  handled.  Thus  heavier  goods,  such  as 
blankets,  flanels,  and  woolen  underwear,  play  a  larger  role 
in  the  North  and  Northwest,  and  these  items  carry  a  later 
dating  than  do  the  regular  items.  Likewise,  it  has  been 
suggested  that  eastern  houses  have  a  larger  percentage  of 
their  business  in  finer  and  more  expensive  goods  in  which 
the  style  factor  plays  a  larger  part  than  is  the  case  in  other 
sections  of  the  country.  Most  eastern  jobbers  cover  limited 
territories,  and  their  customers  are  in  close  proximity  to 
the  market,  so  that  most  of  their  buying  is  done  in  the 
market  and  from  open  stock,  whereas  in  the  West  sales  for 
future  delivery  play  a  larger  role. 

The  various  items  which  are  handled  may  be  classified 
as  follows:  Piece  goods,  notions,  white  goods  and  linens, 
ladies'  ready  to  wear,  men's  furnishings,  hosiery  and  under- 
wear, and  floor  coverings.  Leading  houses  -will  have 
departments  organized  along  these  or  other  general  lines, 
although  the  plan  of  departmentalization  may  differ  greatly 
from  house  to  house.  For  the  present  purpose,  another 
classification  which  should  be  noted  is  that  into  staple  and 
fancy  items,  cotton  piece  goods,  for  example,  being  of  both 
descriptions.  It  may  be  remarked,  however,  that  the  vol- 
ume of  piece  goods  handled  has  decreased  greatly  over  a 
period  of  years. 


292   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

As  in  other  leading  jobbing  lines,  great  interest  has  been 
displayed  in  the  terms  upon  which  merchandise  is  pur- 
chased, and  both  of  the  leading  associations  have  considered 
the  matter,  though  from  somewhat  different  points  of  view. 
The  National  Wholesale  Dry  Goods  Association  has  con- 
sidered primarily  the  adequacy  of  the  cash  discount  or  cash 
premium  allowed  on  separate  articles.  Its  several  divisions, 
in  particular  the  Jobbers  Association  of  Notion  Buyers,  have 
regularly  communicated  in  the  past  with  manufacturers 
whose  discounts,  both  cash  and  trade,  were  unsatisfactory, 
or  who  announced  a  decrease  in  or  elimination  of  the  same. 
The  Southern  Wholesale  Dry  Goods  Association  has  con- 
sidered rather  the  question  of  a  uniform  set  of  terms  to 
apply  to  all  purchases.  It  has  favored  "a  minimum  cash 
discount  of  2  per  cent,  with  minimum  dating  of  60  days  on 
all  commodities. ' '  After  the  opening  of  the  war  period  the 
problem  assumed  new  importance  as  a  result  of  the  cur- 
tailment of  terras  and  decrease  of  discounts  by  houses 
selling  the  jobber.  Thus,  it  is  stated  that  10-day  terms 
were  frequently  quoted  or,  where  60  days  was  still  given, 
such  a  high  rate  of  anticipation  was  attached  as  practically 
to  force  payment  within  10  days.  Coupled  with  this  was 
the  demand  that  the  wholesaler  take  goods  far  in  advance 
of  the  season  for  immediate  payment.  While  this  was  due 
in  part  to  the  efforts  of  purchasers  to  obtain  advance  de- 
liveries for  fear  of  later  shortage,  the  effect  was  to  force 
wholesalers  in  many  cases  to  j&nance  several  seasons'  goods 
at  the  same  time,  thus  j&nancing' two-thirds  their  business 
within  two  months.  The  situation  was  aggravated  by  the 
billing  of  goods  by  mills  prior  to  delivery  to  the  transporta- 
tion company,  in  the  event  of  embargoes  or  refusal  of  the 
carrier  to  receive  the  goods.  The  wholesaler  himself  found 
it  necessary  to  continue  to  carry  the  retailer,  and  his 
regular  terras  on  the  whole  showed  relatively  little  change. 
"Summed  up  briefly,"  then,  it  was  stated  in  1920  that 


TEXTILE  MANUFACTURING  INDUSTRIES    293 

**the  wholesale  dry  goods  house  is  to-day  bearing  both  the 
burdens  of  the  manufacturer  and  of  the  retailer." 

The  Southern  Wholesale  Dry  Goods  Association  alone  has 
taken  formal  action  in  adopting  a  set  of  maximum  terms 
upon  which  it  is  recommended  that  goods  be  sold.  After 
discussion  at  each  of  its  previous  conventions,  in  1915 
terms  were  adopted  at  Nashville  of  2  per  cent  10  days,  net 
30  days,  with  dating  of  October  1  and  April  1  for  shipments 
after  June  1  and  January  1,  respectively.  Intermediate 
shipments  carried  60  days  extra,  net  90  days.  In  191G 
and  1917,  these  terms  were  reaffirmed,  and  in  the  latter 
year  an  interpretation  was  added,  stating  that  June  to 
July  and  Januaiy  to  February  shipments  carried  the  season 
datings,  while  shipments  during  August  to  December  and 
during  March  to  June  carried  the  terms  for  intermediate 
shipments.  At  these  conventions  the  members  practically 
universally  expressed  satisfaction  with  the  terms,  and  in 
a  considerable  number  of  cases  favored  the  adoption  of 
even  shorter  terms.  It  has  been  stated  that  more  than  90 
per  cent  of  the  membership  were  making  terms  less  than 
the  maximum  outlined  in  the  Nashville  resolution. 

The  feeling  in  favor  of  shorter  terms  resulted  in  a  re- 
vision in  1918  at  the  New  Orleans  convention.  The  10  days 
on  season  shipments  were  omitted,  making  terms  on  season 
bills  2  per  cent  October  1  and  April  1,  and  due  net  Novem- 
ber 1  and  May  1.  Intermediate  shipments  carried  terms 
of  2  per  cent  10  days,  net  60  days  but  exception  was  made 
of  department  stores,  which  were  to  be  granted  60  days 
extra  on  such  shipments.  The  latter  concession,  which  was 
intended  to  be  used  merely  where  competition  forced  the 
naming  of  such  terms,  seemed,  however,  to  have  been  "mis- 
understood, misinterpreted,  and  generally  has  caused  con- 
fusion and  dissatisfaction,"  to  quote  the  report  of  the 
committee  on  terms  at  the  1919  convention.  Accordingly 
the  committee,  while  recommending  the  same  season  terms. 


294  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

favored  2  per  cent  60  days  on  intermediate  shipments,  but 
strongly  recommended  that  bale  goods  and  all  intermediate 
shipments  of  other  goods  as  far  as  possible  be  billed  on 
terms  of  2  per  cent  10  days,  net  60  days.  The  longer  terms 
on  intermediate  shipments  were  specified  in  view  of  the 
fact  that  certain  of  the  members  had  previously  employed 
them,  and  they  also  were  felt  to  be  necessary  to  enable 
those  coming  in  contact  with  the  larger  markets  to  meet 
these  terms.  An  unsuccessful  effort  was  made  by  certain 
members  so  situated,  to  reinstate  the  10  days  which  the 
New  Orleans  terms  had  withdrawn.  It  is  understood  that 
there  has  been  no  subsequent  change  in  the  formal  terms. 

The  several  territorial  divisions  of  the  association  have 
also  interested  themselves  in  the  subject  and  have  passed 
resolutions  indorsing  the  recommended  terms,  as  well  as 
made  recommendations  to  the  association's  committee  on 
terms.  In  1919,  a  large  majority  of  eastern  Tennessee 
houses  were  reported  to  have  terms  of  2  per  cent  30  days, 
net  60  days,  and  on  sales  to  department  stores  2  per  cent 
60  days,  net  90  days.  West  Virginia  houses,  which  had 
first  adopted  terms  of  30  days  extra,  2  per  cent  10  days, 
net  60  days,  in  consequence  of  subsequent  adoption  of  2 
per  cent  10  days,  60  days  extra,  net  90  days,  by  outside 
jobbers,  recommended  the  adoption  of  such  terms.  Terms 
have  also  been  adopted  locally  in  certain  cases,  Cincinnati 
houses,  through  their  association  in  1918,  adopting  terms 
similar  to  those  of  the  Southern  Wholesale  Dry  Goods  Asso- 
ciation. 

The  matter  of  terms  of  sale  has  been  discussed  at  many 
of  the  conventions  of  the  National  Wholesale  Dry  Goods 
Association.  Complaint  has  been  made  at  various  times  of 
the  tendency  of  purchasers  to  deduct  discounts  when  run- 
ning somewhat  beyond  the  discount  period,  as  well  as  to 
endeavor  to  deduct  discounts  and  add  interest  instead 
when  taking  longer  time,  such  as,  for  example,  with  terms 


TEXTILE  MANUFACTURING  INDUSTRIES    295 

of  four  months  or  with  note  settlements.  In  1913,  it  was 
suggested  by  several  members  that  formal  action  be  taken, 
but  nothing  was  done.  In  1914,  the  necessity  of  curtailing 
season  datings  in  order  to  afford  an  increased  margin  of 
profit  was  emphasized.  The  old  datings  were  largely  con- 
tinued by  jobbers,  although  they  had  been  eliminated  by 
manufacturers.  Jobbers'  cash  discounts  were  stated  not 
to  differ  much  from  manufacturers'  although  some  jobbers 
had  eliminated  the  old  regular  terms  and  employed  net 
terms  instead.  With  the  pronounced  shortening  of  terms 
by  manufacturers  during  the  war,  increased  stress  was 
placed  upon  the  necessity  of  a  corresponding  shortening  in 
jobbers'  terms.  Additional  emphasis  was  lent  by  the 
steadily  rising  cost  of  doing  business.  The  adjustment  of 
terms  on  each  line  exactly  to  correspond  with  manufac- 
turers' is  not,  however,  possible  in  all  cases,  inasmuch  as 
jobbers'  terms  are  in  many  cases  the  same  for  all  kinds  of 
a  general  type  of  goods.  At  the  1918  meeting  various 
houses  cited  instances  of  shortening  of  terms,  such  as  mov- 
ing the  season  dating  forward  one  month  from  May  1  and 
November  1  to  April  and  October  1,  elimination  of  60  days 
extra,  and  of  10  days  time  on  season  terms,  and  use  of  net 
10  days  in  place  of  2  per  cent  10  days. 

General  agreement,  however,  existed  as  to  the  undesira- 
bility  of  concerted  action,  and  this  was  reiterated  at  the 
meeting  held  in  July,  1918,  the  ''consensus  of  opinion  being 
that  a  nation-wide  uniform  set  of  terms  would  not  be  pos- 
sible for  all  sellers  of  dry  goods,  underwear,  hosiery, 
notions,  and  kindred  goods."  At  the  meeting  earlier  in 
the  year,  the  secretary  had  been  instructed  to  collect  the 
terms  of  members,  which  was  done.  While  great  variety 
appeared,  the  compilation  showed  a  decrease  in  the  time 
given  and  a  tendency  to  closer  terms.  It  was  stated  to  be 
*'a  proven  fact  that  the  'terms  situation'  was  in  better 
shape  than  at  any  previous  period,"  and  that  "the  im- 


296   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

provement  might  reasonably  be  expected  to  continue." 
While  there  was  an  effort  at  further  shortening,  terms  at 
present,  however,  are  stated  to  be  substantially  on  the  same 
basis  as  indicated  in  the  survey. 

"We  may  proceed  to  examine  in  greater  detail  the  terms 
of  the  135  houses  which  are  given  in  this  survey.  The 
general  terms  are  2  per  cent  10  days,  60  days  extra,  for 
many  years  recognized  as  the  regular  dry  goods  terms. 
AVhile  in  many  cases  no  terms  beyond  the  70-day  period 
are  formally  quoted,  and  bills  are  due  net  after  70  days, 
in  other  cases  net  90  days  or  net  4  months  is  frequently 
specified,  though  there  has  been  a  tendency  toward  the 
first-named  net  terms.  Anticipation  at  the  rate  of  6  per 
cent  per  annum  is  generally  permitted.  This  gives  a  cash 
discount  of  3  per  cent  10  days,  which,  in  fact,  is  quoted  by 
some  houses,  as  well  as  in  some  cases,  1  per  cent  10  days, 
net  30  days.  Season  datings  most  frequently  specified  are 
April  1  and  October  1,  in  general  for  shipments  made  prior 
to  2  months  before  the  dating,  thus  being  February  1  and 
August  1  for  the  datings  given,  after  which  time  the  regu- 
lar 60  days'  extra  terms  are  given.  Certain  houses,  how- 
ever, employ  other  season  datings,  in  particular  Maj^  1  and 
November  1,  for  the  general  line,  while  several  instances  of 
earlier  datings,  such  as  February  1  and  March  1  and 
August  1  and  September  1,  were  also  noted.  Orders  bear- 
ing the  season  dating,  in  general,  carry  no  further  dating, 
although  in  certain  cases  60  days  extra  was  also  given, 
mainly  by  houses  having  the  earlier  season  datings  and 
practically  nullifying  the  same. 

In  all  sections  houses  are  found  which  do  not  employ 
the  regular  terms  or  which  have  no  season  datings.  In 
part  this  is  the  result  of  a  shortening  of  terms  in  recent 
years,  while  in  part  it  is  a  reflection  of  the  character  of 
business  done.  Some  houses  give  merely  30  instead  of  60 
days  extra  on  new  accounts,  while  others  eliminate  the 


TEXTILE  MANUFACTURING  INDUSTRIES    297 

10  days  of  grace  on  season  datings.  Jobbers  handling 
primarily  special  lines  such  as  hosiery  and  underwear,  or 
men's  furnishings,  follow  the  manufacturers'  terms  on 
these  items  in  some  cases.  Certain  markets,  such  as  St. 
Louis  and  Baltimore,  have  been  known  in  the  past  for 
their  liberality  in  the  matter  of  terms,  but  the  former 
advanced  the  customary  dating  from  May  1  and  November 
1  to  April  1  and  October  1  during  the  last  few  years. 
Jobbers  located  at  smaller  centers  in  various  sections  in  a 
number  of  cases  instance  the  competition  of  a  larger  neigh- 
boring market  as  forcing  the  granting  of  60  days  extra, 
a  November  1  season  dating,  etc. 

The  extent  to  which  houses  classify  their  business  and 
extend  different  terms  on  each  class  would  appear  to  vary 
roughly  to  some  extent  with  the  size  of  the  market. 
Houses  located  in  the  smaller  centers  in  many  cases  have 
but  one  set  of  terms  to  apply  to  their  entire  business.  In 
the  larger  markets,  in  particular  those  of  the  Middle  West, 
distinction  in  general  is  made  between  spring  goods  and 
fall  goods,  factory  or  manufactured  goods  produced  by 
the  house  itself,  and  mill  shipments,  while  staples  in  cer- 
tain cases  are  also  distinguished.  Between  these  two  ex- 
tremes there  is  wide  variety,  many  houses  having  a  lesser 
number  of  classes,  and  in  certain  sections,  such  as  in  the 
East,  the  entire  range  of  types  is  frequently  not  found. 
Classification  presents  a  twofold  aspect,  certain  goods  hav- 
ing both  different  discounts  and  net  'terms,  while  with 
others  the  difference  is  merely  in  the  season  dating.  Mill 
shipments  in  general  bear  terms  of  net  30  days,  although 
some  houses  give  net  60  days  or  net  60  days  on  certain 
items  only,  such  as  towels  and  white  goods,  while  giving  net 
30  days  on  other  items.  Terms  on  overalls,  work  shirts, 
yarns,  spool  cotton  and  thread  differ  somewhat,  but  are 
usually  1  or  2  per  cent  10  days,  net  30  or  60  days,  without 
season  dating. 


298    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

In  part,  classification  results  from  an  effort  to  shorten 
terms  or  reduce  discounts  to  correspond  to  manufacturers' 
changes  in  terms  with  respect  to  certain  items.  Thus,  cer- 
tain houses  give  no  season  dating  on  some  items  like  prints, 
domestics,  percales,  ginghams,  and  sheetings,  or  in  some 
cases  only  on  specified  brands.  Some  houses,  in  addition, 
have  eliminated  the  cash  discount,  and  bill  these  and  simi- 
lar items  on  terms  of  net  60  days,  while  others  have 
advanced  the  season  dating  one  month,  from  April  1  and 
October  1  to  March  1  and  September  1.  This  tendency  is 
also  seen  in  connection  with  certain  items  such  as  hosiery 
and  knit  underwear,  which,  while  frequently  continuing 
to  bear  a  season  dating,  in  the  case  of  many  other  houses 
are  sold  without  such  dating,  or  bear  merely  terms  such  as 
net  10  days  or  1  per  cent  10  days,  30  days  or  60  days 
extra,  similar  discounts  being  applied  also  by  certain 
houses  in  connection  with  the  season  dating.  Certain  items, 
however,  frequently  carry  the  later  season  datings  of  May 
1  and  November  1.  Among  these  may  be  noted  laces  and 
embroideries,  white  goods,  cloaks,  and  furs  (which  in  some 
cases  carry  December  1  dating),  blankets,  underwear 
(when  a  dating  is  given),  sweater  coats,  and  fancy  knit 
goods.  These  items  are  of  a  twofold  character,  being  either 
heavier  goods,  which  will  be  wanted  for  later  fall  use,  or 
style  items.  Some  eastern  houses  report  a  later  shipment 
date  in  lieu  of  season  datings,  while  some  houses  extend 
additional  time  on  shipments  to  more  distant  territories. 

Collections  naturally  vary  with  the  different  seasons  of 
the  year,  payments  being  concentrated  largely  in  the  spring 
and  fall.  As  fall  sales  are  heavier  than  spring  sales,  they 
are  heavier  in  the  fall,  this  being  noted  alike  for  each  of 
the  various  parts  of  the  country.  In  certain  agricultural 
sections  this  will  be  accentuated  by  the  fact  that  accounts 
are  carried  to  some  extent  until  the  fall.  The  movement  of 
merchandise   with  the   majority   of   wholesale   dry   goods 


TEXTILE  MANUFACTURING  INDUSTRIES    299 

bouses  is  about  40  per  cent  in  the  first  6  montbs  of  the  year 
and  60  per  cent  in  the  last  6  months. 

The  following  figures  show  the  proportion  of  their  total 
annual  receipts  received  by  3  houses  during  each  month  of 
the  year.  It  should  be  noted,  however,  that  the  data  are 
not  strictly  comparable,  inasmuch  as  the  terms  of  the 
houses  differ  somewhat: 


Jan. 

Feb. 

Mar. 

Apr. 

May 

June 

New  England* 

7.0 
5.6 
6.0 

5.6 
5.0 
6.1 

6.5 
5.4 
5.1 

7.4 
7.0 
6.1 

8.3 
7.0 
6.6 

8.3 

Northwest  

5.7 

North  Pacific  Coast 

6.G 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

New  England* 

Northwest  

7.7 
6.6 
7.8 

7.5 
7.0 
7.9 

8.4 

8.7 

10.8 

9.5 
12.0 
13.8 

11.5 
18.0 
11.8 

12.3 
12.0 

North  Pacific  Coast 

11.5 

*  Another  New  England  house  also  notes  that  payments  drag  from 
about  Jan.  15  to  Mar.  15  and  from  July  1  to  Sept.  1. 

A  leading  authority  states  that  on  an  average  about  50 
per  cent  of  the  accounts  of  retailers  with  wholesalers  are 
discounted,  and  about  20  per  cent  are  anticipated  at  the 
usual  anticipation  rate  of  6  per  cent,  dependent  upon 
locality  and  trade  conditions. 

Interest  has  been  displayed  in  the  trade  acceptance  by 
both  trade  associations.  The  national  association  has  sent 
out  considerable  descriptive  literature,  while  the  1918  con- 
vention of  the  southern  association  adopted  a  resolution 
favoring  it,  and  several  members  who  were  employing  it 
reported  themselves  well  pleased  with  it.  At  the  1919 
convention,  20  members  present  at  one  of  the  meetings 
stated  that  they  used  acceptances.  On  the  whole,  however, 
as  in  other  jobbing  lines,  the  instrument  is  not  used  by 
the  majority  of  houses. 


300    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

Men's  Wear  Woolen  and  Worsted  Jobbing.^'' — As  is  the 

ease  with  goods  for  women's  wear,  woolens  and  worsteds 
for  men's  wear  find  their  way  into  consumption  via  one 
of  two  channels — the  jobber  who  sells  to  the  small  tailor 
and  the  ready-made  clothing  manufacturer.  The  latter 
industry  developed  earlier  than  did  the  women's  ready- 
made  industry,  which  consequently  has  drawn  most  of  its 
forms  and  methods  of  operations  from  it,  and  a  greater 
portion  of  men's  clothing  is  factory  made.  In  1900,  the 
output  of  men's  clothing  as  a  factory  product  was  already 
valued  at  twice  ^he  custom  product.  The  number  of 
factory-made  garments  would  be  even  greater,  for  the  rela- 
tively higher  priced  garments  are  made  by  the  tailor. 

The  jobbers  of  men's  wear  woolens  and  worsteds  and 
tailors'  trimmings  are  of  two  principal  kinds.  Due  to  the 
scarcity  existing  in  the  cloth  markets  during  the  war  and 
the  great  number  of  resales,  the  class  of  traders  existing 
alongside  of  the  so-called  "old-line"  jobber  assumed  par- 
ticular importance  in  this  branch  of  the  textile  industry 
also.  The  principal  markets  in  which  trading  occurs  are 
New  York,  which  is  by  far  the  largest,  Boston,  Phila- 
delphia, and  Chicago.  With  such  concerns  terms  vary 
greatly,  and  the  question  is  largely  a  price  problem.  A 
large  percentage,  however,  sell  on  terms  of  net  30  days, 
although  spot  cash  or  net  10  days,  net  60  days,  and  net  4 
months  are  also  given.  Some  houses  of  this  description 
note  a  decrease  in  the  length  of  terms  during  the  past  few 
years,  such  as  from  4  months  to  60  days  and  from  60  days 
to  30  days. 

The  old-line  jobbers,  through  their  association,  in  Janu- 
ary, 1918,  adopted  a  resolution  effective  March  1,  1918, 
in  favor  of  terms  of  7  per  cent  10  days,  6  per  cent  30  days, 
5  per  cent  60  days.    Invoices  were  to  be  dated  ahead  about 

"Acknowledgment  is  due  Mr.  Frank  C.  Kay,  Secretary-Treasurer, 
National  Woolens  and  Triniminge  Association,  for  reading  this  section. 


TEXTILE  MANUFACTURING  INDUSTRIES    301 

2  months,  December  deliveries  thus  bearing  February  1 
dating,  with  the  exception  that  January-February  deliv- 
eries bear  April  1  and  July-August  deliveries  bear  October 
1  dating.  Bills  are  due  net  in  4  months  after  the  dating, 
and  are  vsubject  to  an  interest  charge  of  6  per  cent  per 
annum  thereafter.  The  same  rate  of  interest  is  allowed  for 
anticipation.  On  goods  sold  at  net  prices,  usual  terms  are 
net  cash  10  and  30  days.  Goods  shipped  to  Pacific  Coast 
territory  may  bear  longer  dating,  April  1  on  December 
shipments,  October  1  on  June  shipments,  and  30  days  extra 
on  shipments  during  the  other  months.  Although  the 
matter  of  terms  had  been  frequently  discussed,  no  action 
had  been  taken  prior  to  1918,  and  no  uniform  regular  terms 
existed,  although  the  terms  which  were  adopted  at  that 
time,  namely  7  per  cent  10  days,  6  per  cent  30  days,  and  5 
per  cent  60  days,  had  been  previously  in  general  employed. 
In  addition,  there  are  book  houses  who  put  up  sample 
books  of  the  fabrics  which  they  have  purchased  from  the 
mills.  The  tailor  displays  the  book  to  his  customer,  who 
selects  the  style  he  desires,  and  the  tailor  then  orders  a  suit 
length  of  the  style  from  the  book  house.  There  is  stated 
to  be  little  difference  in  the  relative  strength  of  the  book 
house  and  the  regular  jobber  as  a  link  in  the  distributive 
chain  in  the  various  sections  of  the  country.  Certain  book 
houses  combine  jobbing  with  their  regular  business  to  a 
greater  or  lesser  extent.  The  customer  of  the  book  house 
requires  little  credit,  due  to  the  fact  that  he  shifts  to  it 
the  burden  of  stocking  the  goods.  In  consequence,  a  large 
portion  send  cash  with  order  or  accept  C.  0.  D.  shipments, 
while  some  remit  on  receipt  of  goods  or  when  sending  the 
next  order,  and  others  receive  10  days,  e.  o.  m.  terms  or  30 
days.  The  same  principle  underlies  the  granting  of  time 
as  in  the  case  of  proximo  terms,  namely  to  group  invoices 
in  case  of  frequent  shipments,  and  thus  also  to  avoid  the 
annoyance  incident  to  C.  0.  D.  shipments.    Orders  for  large 


302   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

quantities  of  material  bear  30  or  60  days,  and  only  rarely 
are  longer  terms  extended,  such  as  90  days  in  the  case  of 
orders  for  stock.  For  years  a  discount  of  7  per  cent  has 
been  granted,  but  this  was  abolished  in  certain  cases  in 
1919. 


CHAPTER  XV 

THE  APPAREL  AND  LEATHER  INDUSTRIES 

The  present  chapter  considers  two  groups  of  industries 
dealing  with  products  destined  for  consumption  rather 
than  for  industrial  use.  The  first  group  includes  ready-to- 
wear  apparel  of  various  kinds;  the  second  group,  tanning 
and  boots  and  shoes.  In  both  these  groups  of  industries, 
the  distinctive  wholesaler  plays  relatively  little  part.  Just 
as  in  the  apparel  lines  as  a  whole  the  distributive  chain 
runs  from  cloth  manufacturer  to  garment  manufacturer 
to  retailer,  so  in  the  leather  industry  it  runs  from  tanner 
to  shoe  manufacturer  to  retailer. 

In  both  these  groups  of  industries  the  same  general  fac- 
tors chiefly  govern  terms  as  were  noted  at  the  opening  of 
the  previous  chapter.  In  all  the  apparel  lines,  other  than 
women's  outer  garments,  season  datings  or  extra  datings 
which  approximate  them,  are  customary,  while  in  the 
leather  group  they  are  usually  found  in  the  case  of  shoes. 
These  datings  are  twofold — spring  and  fall,  and  run  from 
approximately  April  1  to  July  1,  and  from  October  1  to 
January  1.  Tanners,  however,  do  not  grant  them,  and  the 
same  is  true  of  tailors  to  the  trade  who  make  garments 
only  as  needed. 

A  second  factor  influencing  terms  in  these  industries  is 
the  large  number  of  individuals  who  possess  little  capital. 
As  a  result  terms  lack  uniformity  in  many  cases  and, 
especially  in  the  apparel  lines,  have  a  tendency  to  vary 
according  to  market  conditions  at  the  moment,  and  accord- 
ing to  the  relative  strength  of  buyer  as  compared  with 
seller. 

303 


304    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

The  discounts  allowed  in  the  various  apparel  lines  are 
usually  high,  corresponding  to  those  indicated  in  the  previ- 
ous chapter.  Thus  men's  clothing  carries  terras  of  7  per 
cent  10  days  and  millinery  terms  of  6  per  cent  10  days, 
both  with  season  dating.  Another  distinctive  feature  is 
the  fact  that  graded  discounts  are  often  found.  In  the 
tanning  industry  discounts  are  lower,  and  range  from  4 
per  cent  on  sole  leather  to  5  per  cent  on  upper  leather. 
Shoes  on  the  other  hand  carry  a  discount  of  only  1  or  2 
per  cent  on  sales  by  wholesalers,  although  manufacturers' 
terms  vary  greatly. 

Men's  Clothing".^ — Manufacturers  of  men's  ready-to- 
wear  clothing  may  be  divided  into  several  classes.  The 
first  distinction  is  between  makers  of  trade-marked  clothing 
and  makers  of  clothing  unidentified  by  either  trade-mark 
or  label.  The  former  feel  to  a  greater  extent  the  desira- 
bility of  greater  concentration  of  work  under  their  direct 
supervision,  and  the  large  inside  factory  is  in  fact  on  the 
increase  everywhere  but  in  New  York.  On  the  other  hand, 
particularly  in  that  center,  the  system  of  contracting  is 
still  largely  employed.  Between  the  two,  the  medium-sized 
house,  it  is  felt  in  some  quarters,  is  being  driven  out,  due 
to  the  disadvantages  inherent  in  its  competition  with  both 
the  small  manufacturer  on  low  grade  and  the  large  manu- 
facturer on  better  grade  garments.  The  capital  of  the 
typical  cutting  house  is  small  as  compared  with  its  turn- 
over and  in  consequence  ' '  the  whole  structure  rests  on  the 
ready  saleability  of  the  cutter's  product, "^  the  chain  ex- 
tending from  retailer  through  cutter  to  manufacturer  of 
cloth. 

As  is  well  known,  the  industry  is  distinctly  seasonal, 
although  during  the  past  4  years  activities  have  continued 


*  Acknowledgment   is   due  Mr.   Philip   Hamburger,   Jr.,   Treasurer, 
Henry  SoniitO)orn  and  Co.,  Inc.,  Baltimore,  for  reading  this  section. 
'Cherington,  The  Wool  Industry,  (Chicago,  1916),  p.  204. 


THE  APPAREL  AND  LEATHER  INDUSTRIES    305 

to  a  greater  extent  over  the  entire  12  months.  The  dura- 
tion of  the  spring  season  is  from  about  November  15  to 
May  15,  the  cloth  being  bought  during  the  previous  June, 
July,  and  August,  and  the  salesmen  soliciting  orders  dur- 
ing September,  October,  and  November.  Deliveries  are 
generally  made  after  January  1,  being  heaviest  in  Feb- 
ruary and  March,  and  re-orders  follow  in  the  spring.  The 
cloth  for  the  fall  season  is  bought  in  December,  January, 
and  February,  orders  are  received  during  March,  April, 
and  May,  and  deliveries  are  heaviest  in  August  and  Sep- 
tember. Little,  in  particular  in  the  higher-priced  lines,  is 
made  for  stock. 

There  is  no  standardization  of  terms  in  the  industry.  It 
has  been  the  practice  for  the  manufacturer  to  date  ship- 
ments ahead,  so  as  to  permit  the  retailer  to  dispose  of  part 
of  his  purchases  before  being  required  to  pay  the  manu- 
facturer. Thus  up  to  recent  years  terms  were  mostly  9 
per  cent  for  cash  within  10  days,  or  7  per  cent  10  days, 
with  December  1  dating  on  fall  goods  and  June  1  dating  on 
spring  goods.  In  certain  cases,  however,  the  dating  was 
November  1  or  November  15  on  fall  goods  and  May  1  or 
May  15  on  spring  goods.  Some  houses  have  distinguished 
further  between  different  classes  of  goods,  suits,  for  ex- 
ample, being  dated  November  1  and  overcoats  December  1, 
or  May  1  being  specified  on  spring  goods  and  June  1  on 
distinctly  summer  goods.  Late  shipments,  for  example, 
after  April  1  or  April  10  on  spring  and  October  1  or 
October  10  on  fall  goods,  in  many  cases  bore  terms  of  7  per 
cent  10  days,  60  days  extra,  or  7  per  cent  60  days.  Tradi- 
tion in  the  industry  sanctioned  terms  of  6  per  cent  30  days, 
5  per  cent  60  days,  and  net  4  months.  In  some  cases,  how- 
ever, 7  per  cent  10  days,  5  per  cent  30  days,  and  4  per  cent 
60  days  was  given.  Some  manufacturers  have  considered 
accounts  as  due  net  at  the  close  of  90  days.  Other  manu- 
facturers, although  permitting  30  days  or  longer  settle- 


306    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

ments  with  correspondingly  reduced  discounts,  have  given 
formal  terms  of  only  7  per  cent  10  days,  and  have  thus 
been  able  to  insist  upon  payment  of  accounts  of  financially 
involved  customers  at  any  time  after  the  expiration  of  the 
initial  10-day  period.  Anticipation  has  been  generally  per- 
mitted at  the  rate  of  6  per  cent  per  annum,  but  most  settle- 
ments are  made  under  the  regular  discount  or  net  basis. 

During  the  last  few  years  many  manufacturers  have 
shortened  terms,  although  the  larger  number  continue  to 
employ  the  regular  terms.  Some  have  eliminated  the 
dating  entirely,  while  others  have  granted  datings  that 
would  not  be  so  far  advanced  in  the  season.  Some  manu- 
facturers give  no  terms  longer  than  5  per  cent  30  days,  or 
5  per  cent  60  days  without  dating.  There  has  also  been  a 
tendency  away  from  the  high  discounts  which  were  for- 
merly almost  universal.  Some  manufacturers,  while  re- 
taining season  dating  terms,  give  only  8  per  cent  for 
immediate  payment,  others  7  per  cent  10  days,  and  5  per 
cent  for  payment  on  dating  dates,  such  as  June  1  and 
December  1,  or  specify  that  accounts,  while  bearing  the 
customary  7  per  cent  discount  at  the  dating  period,  are  due 
net  in  30  days  thereafter.  The  princij^al  controversy,  how- 
ever, concerns  the  use  of  so-called  "net  terms."  By  the 
phrase  is  meant  merely  terms  where  the  discounts  art 
small,  and  correspond  to  the  cash  discounts  generally  in 
vogue  in  other  lines.  An  instance  is  afforded  by  the  terms 
of  2  per  cent  10  days,  net  60  days,  without  season  dating, 
now  employed  by  certain  manufacturers.  Other  house;: 
employing  these  terms  give  datings,  such  as  April  1.  The 
use  of  such  terms  at  times  when  making  quantity  sales  to 
large  dealers  is  also  noted.  A  study  made  several  years  ago 
states  that  some  high-grade  clothing  is  sold  on  net  lOday 
terms,^  and  some  manufacturers  give  terms  of  net  10  days 

'Bureau  of  Foreign  and  Domestic  Commerce,  Miscellaneous  Series 
No.  34. 


THE  APPAREL  AND  LEATHER  INDUSTRIES    307 

with  July  1  dating  on  summer  clothing.  Close-out  sales 
are  made  either  on  a  spot  cash  or  net  10  or  net  30-day 
basis.  Several  houses  which  had  adopted  shorter  terms  are 
reported  to  have  gone  back  to  the  longer  terms  in  1919. 

The  subject  of  standardization  of  terms  has  been  dis- 
cussed for  some  time  by  committees  of  manufacturers  and 
retailers.  The  latter  prefer  standardization  in  the  regular 
or  old  way,  and  have  objected  strongly  to  the  introduction 
of  net  terms,  which  are  favored  by  some  producers.  Other 
producers,  however,  believe  that  the  higher  discount  terms 
have  tended  to  accelerate  collections.  In  consequence,  no 
definite  arrangement  has  been  consummated.  The  opinion 
has  been  expressed  that  the  many  changes  just  noted  in 
terms  in  the  industry  during  recent  years  do  not  represent 
any  real  standardization,  but  have  been  made  from  the 
point  of  view  of  the  individual  house. 

Lack  of  rigid  adherence  to  terms  in  the  past  was  noted.* 
Retailers,  it  has  been  said,  often  bought  on  one  basis  and 
wished  to  settle  on  another.  The  liberal  credit  policy  fol- 
lowed, due  in  some  measure  to  keen  competition,  encour- 
aged merchants  who  were  inexperienced  and  possessed 
inadequate  capital  to  engage  in  the  retailing  of  clothing. 
They  then  required  the  manufacturer's  aid  in  carrying  the 
merchandise.  On  the  other  hand,  because  of  the  high  dis- 
counts given,  wrongful  deduction  of  discounts  was  fre- 
quent. Thus  some  retailers  expected  to  give  notes  bearing 
interest  at  6  per  cent  per  annum,  while  obtaining  the  full 
cash  discount,  and  succeeded  in  obtaining  such  concessions 
from  manufacturers.  Up  to  1921,  however,  collections 
improved  greatly  and  failures  among  retailers  have  been 
few  up  to  within  comparatively  recent  months.     The  re- 

*  The  material  in  this  paragraph  relative  to  conditions  in  the  past 
has  been  taken  from  a  paper  on  Datings  and  Discounts,  read  bj  Mr. 
Ira  D.  Kingsbury  before  the  convention  of  the  National  Association 
of  Clothiers,  June,  1914.  The  paper  is  reproduced  in  the  Bureau  of 
Foreign   and   Domestic   Commerce,   Miscellaneous   Series   No.    34. 


308    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

taller  did  a  large  volume  of  business  at  high  prices,  while 
payments  by  him  were  stimulated  through  a  desire  to 
obtain  his  full  allotment  of  merchandise. 

Trousers  are  made  either  by  regular  clothing  manufac- 
turers, houses  making  also  summer  clothing,  overcoats  or 
work  clothing,  or  by  special  trouser  manufacturers.  They 
carry  either  terms  of  7  per  cent  10  days,  6  per  cent  30  days, 
and  5  per  cent  60  days  (stated  to  have  been  largely  initi- 
ated by  clothing  manufacturers)  or  terms  of  net  60  days, 
with  a  discount  of  2  per  cent  10  days,  or  1  per  cent  10  days, 
30  days  extra  in  some  cases.  A  spring  dating  of  April  1 
or  May  1  and  a  fall  dating  of  September  1,  October  1,  or 
November  1  are  generally  given  for  January  to  February 
and  June  to  July  or  August  shipments,  respectively. 

In  recent  years  the  tailor  to  the  trade,  who  in  a  central 
factory  makes  clothes  to  measure,  which  are  ordered 
through  retailers  or  agents  in  the  various  sections  of  the 
country,  has  been  an  increasingly  important  factor  in  the 
industry.  In  addition  to  his  regular  business,  he  is  often 
employed  by  large  retailers  to  make  up  clothes  after  their 
own  styling,  just  as  is  the  regular  manufacturer  who  does 
not  feature  his  own  name.  Although  found  in  all  sections 
of  the  country,  the  tailor-to-the-trade  branch  is  stated  to 
be  considerably  larger  in  the  Southwest  than  either  the 
ready-made  or  merchant-tailoring  branches.  As  is  to  be 
expected,  it  is  relatively  stronger  in  the  smaller  than  in  the 
larger  centers. 

Distinction  in  terms  is  made  by  the  tailor  to  the  trade 
according  to  the  credit  rating  of  the  customer.  Those  with 
good  rating  in  general  receive  net  30-day  terms,  monthly 
settlement,  for  example,  by  the  10th,  being  permitted  in 
certain  cases.  Some  houses  provide  10-day  terms  for  pur- 
chasers of  lesser  rating.  A  deposit,  such  as  $5  per  suit 
and  $1  per  pair  of  single  trousers,  when  placing  the  order, 
and  C.  0.  D.  terms  are  generally  required  in  the  case  of 


THE  APPAREL  AND  LEATHER  INDUSTRIES   309 

those  who  do  not  have  a  rating  sufficient  to  entitle  them 
to  credit  on  open  account.  While  the  larger  houses  do 
the  majority  of  their  business  upon  30-day  terms,  certain 
houses  are  known  in  the  trade  as  C.  O.  D.  houses  and  deal 
almost  entirely  with  unrated  merchants.  In  certain  cases 
cash  in  advance  is  required,  or  else  a  guarantj^,  the  regular 
monthly  settlement  being  permitted  in  the  latter  case. 
Some  houses  allow  a  cash  discount,  such  as  2  per  cent  10 
days  or  3  per  cent  cash  in  advance.  Regular  ready-made 
clothing  manufacturers  in  certain  eases  sell  also  made-to- 
measure  garments,  terms  being  net  30  days  or  in  some 
instances  net  cash. 

Jobbing  in  men's  ready-made  clothing  is  very  small.  In 
the  study  above  referred  to,  data  obtained  from  64  manu- 
facturers showed  that  98.21  per  cent  of  the  output  was 
sold  to  retailers  and  only  1.29  per  cent  to  jobbers.  The 
latter  are  stated  to  be  largely  disappearing,  except  where 
they  have  goods  made  up  for  themselves  to  be  sold  under 
their  own  labels.  The  cheaper  goods  are  mainly  handled, 
the  manufacturers  of  trade-marked  clothing  selling  their 
product  direct  to  the  retailer,  in  general  granting  the 
latter  exclusive  agencies.  Even  in  small-town  and  country 
trade,  which  is  now  their  chief  field  of  activity,  their  work 
is  confined  mainly  to  the  sale  of  working  clothes.  A  few 
jobbers  also  exist  who  dispose  of  slow  lines  for  manufac- 
turers on  commission,  or  else  purchase  the  same  outright. 
Terms  of  jobbers  are  reported  to  vary  greatly,  and  no  defi- 
nite statement  can  be  made. 

Women's  Outer  Garments.'^ — There  are  several  distinct 
branches  in  the  women's  garment  industry.  Cloak  and 
suit  manufacturers  generally  do  not  make  skirts,  although 
there  is  a  distinct  tendency  for  them  to  do  so.  The  same 
manufacturer  at  times   makes  both   skirts  or  suits   and 

'Acknowledgment  is  due  Mr.  J.  B.  Bernstein,  City  Editor, 
Women's  Wear,  for  reading  this  section. 


310    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

dresses,  although  the  large  majority  of  manufacturers  con- 
fine their  attention  to  either  article.  It  is  estimated  that 
95  per  cent  of  ladies'  waist  manufacturers  specialize  in 
this  product.  There  are  thus  the  cloak  and  suit,  skirt, 
dress,  and  waist  branches,  each  of  which  has  its  distinct 
identity.  In  addition  to  the  manufacturers,  there  are  so- 
called  "jobbers"  or  stock  houses,  who,  however,  practically 
create  their  own  styles,  furnish  their  own  materials,  and 
have  their  garments  made  up  by  sub-manufacturers  and 
contractors.  There  is  a  pronounced  trend  towards  stock 
houses  in  the  cloak  and  suit  trade,  especially  in  New  York, 
and  the  number  of  large  manufacturing  plants  is  decreas- 
ing. Contracting  in  the  industry,  while  it  figures  largely, 
is  less  important  than  for  men's  wear,  due  to  the  greater 
number  of  small  cutting  concerns. 

Jobbers  are  found  in  all  the  larger  centers  where  the 
manufacturers  are  located.  New  York  is  the  largest  center 
in  the  cloak  and  suit  industry,  its  output  being  estimated 
in  the  census  of  1910  at  approximately  70  per  cent  of  the 
total  output  of  the  industry,  and  it  produces  finer  goods 
than  other  centers.  Cleveland  is  noted  for  the  production 
of  staple  articles,  and  .Philadelphia,  Boston,  and  Chicago 
are  also  large  centers.  St.  Louis  is  the  second  largest 
center  in  the  skirt  industry.  It  has  many  jobbers, 
but  no  stock  houses,  and  also  has  relatively  few  small 
concerns,  as  is  the  case  in  New  York  and  elsewhere.  The 
principal  dress  centers  include  New  York,  Chicago,  Phila- 
delphia, St.  Louis,  Cleveland,  Cincinnati,  Boston,  and  Los 
Angeles. 

The  industry  differs  in  some  important  particulars  from 
the  men's  clothing  industry.  There  are  fewer  trade- 
marked  lines,  and  the  agency  and  branch  store  are  not 
employed.  The  larger  New  York  stores  are  stated  to  seek 
the  smaUer  manufacturers  rather  than  the  larger  factories 
for  the  greater  part  of  their  stock,  and  have  a  large  part 


THE  APPAREL  AND  LEATHER  LNDUSTRIES    311 

in  the  creation  of  their  styles.  The  time  between  orders 
by  the  store  and  delivery  by  the  cutter  is  very  short,  and 
cutters  endeavor  to  keep  goods  in  process  of  manufacture 
as  small  as  possible,  seldom  getting  far  ahead  of  orders 
actually  in  hand. 

Sales  are  made  to  department  stores,  specialty  shops, 
and  catalogue  houses.  Seasons  differ  somewhat.  Cloak 
and  suit  orders  in  New  York  are  placed  from  July  15  to 
October  15  and  from  January  15  to  about  2  Aveeks  before 
Easter.  Shipments  occur  respectively  in  August,  Septem- 
ber and  October,  and  February  and  March.  The  dullest 
months  are  December  and  June.  In  Cleveland,  however, 
orders  are  stated  to  be  taken  further  in  advance  of  the 
season  and  deliveries  made  earlier.  They  begin  about  July 
1  and  January  1,  and  are  heaviest  from  July  15  to  Sep- 
tember 15  and  in  February  and  March  respectively.  In 
the  skirt  industry  heaviest  sales  are  made  in  July  and 
August  and  in  January  and  February,  heaviest  deliveries 
being  approximately  one  month  later.  These  seasons  must 
be  further  subdivided  in  view  of  the  change  in  the  separate 
skirt  business  from  a  staple  character  to  the  manufacture 
of  novelties  for  sport  wear,  etc.,  which  has  made  it  neces- 
sary to  carry  a  far  larger  stock.  St.  Louis  has  selling  sea- 
sons running  from  June  15  to  August  1  and  from  December 
1  through  January  and  in  some  years  through  the  early 
days  of  February,  heaviest  deliveries  being  from  August  1 
to  September  15  and  in  February  respectively  for  fall  and 
spring  seasons.  October,  November,  and  December  are  the 
duU  months  in  the  skirt  industry. 

The  dress  industry,  except  when  depression  is  pro- 
nounced, is  a  12-month  industry.  Dresses  can  be  manu- 
factured in  so  many  different  weights  to  suit  climatic  con- 
ditions, that  an  all-year-round  business  results.  Sales  have 
become  so  large  that  for  the  last  few  seasons  they  have 
practically  surpassed  the  sale  of  suits.     Waists,  however, 


312   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

are  seasonal  to  some  extent,  although  the  business  is  prac- 
tically continuous.  Selling  for  the  fall  season  occurs  in 
July  and  August  and  for  spring  in  January  and  February. 
Heaviest  deliveries  are  in  August  and  September  and  in 
March,  April,  and  May,  respectively. 

In  New  York  City,  the  Garment  Conference  Council  of 
"Wholesalers  and  Retailers  adopted  a  resolution  in  July, 
1917,  fixing  maximum  terms.  This  was  later  confirmed  by 
the  respective  local  associations  of  cloak  and  suit  manu- 
facturers, dress  and  waist  manufacturers,  and  garment 
"jobbers,"  and  concurred  in  by  various  associations  of 
retailers.  Terms  had  previously  been  very  mixed,  ranging 
from  net  up  to  discounts  as  high  as  16  per  cent,  and  the 
abuse  prevailed  of  deduction  of  excess  discounts  by  pur- 
chasers. In  the  dress  and  waist  industries  10  per  cent  was 
called  regular.  The  maximum  terms  adopted  were  8  per 
cent  10  days,  7  per  cent  30  days,  6  per  cent  60  days,  or 
so-called  "net"  terms,  namely,  2  per  cent  10  days,  1  per 
cent  30  days,  net  60  days,  the  price  being  advanced  cor- 
respondingly in  the  former  case  to  compensate  for  the 
difference  in  discount.  A  strictly  net  basis  is  also  per- 
mitted, as  are  e.  o.  m.  10-day  terms.  The  endeavor  was 
first  made  to  offer  merely  a  2  per  cent  discount,  but  in 
consequence  of  the  opposition  of  the  retailers,  who  favor 
a  high  discount  (as  also  in  men's  clothing),  a  compromise 
was  effected  after  about  a  month  whereby  the  two  optional 
sets  of  terms  were  specified.  It  has  been  stated  that  the 
majority  of  cloak  and  suit  and  skirt  manufacturers  selling 
low-priced  garments  offer  only  the  low  discount  and  short 
dating.  Few  dress  and  waist  houses  in  the  association 
employ  the  "net"  or  strictly  net  terms.  The  length  of 
time  given  will  vary  with  the  individual  credit  risk,  and 
thus  some  buyers  receive  only  30  days,  etc. 

Cloak  and  suit  manufacturers  in  the  Cleveland  market, 
however,  have  adopted  no  uniform  terms,  although  "the 


THE  APPAREL  AND  LEATHER  INDUSTRIES    313 

consensus  of  opinion  has  been  to  sell  as  nearly  as  possible 
on  a  net  basis  with  60  to  90  days  dating,"  while  at  the 
same  time  offering  a  reasonable  cash  discount.  Up  to  about 
10  years  ago  the  majority  of  houses  sold  on  terms  of  from 
7  to  10  per  cent  10  days,  with  proportional  discounts  for 
payments  within  60  days  and  90  days.  Terms  now  range 
from  2  per  cent  10  days,  net  30  days,  to  5  per  cent  10 
days,  2  per  cent  10  days,  60  days  estra,  but  the  majority 
give  terms  of  4  per  cent  10  days  or  2  per  cent  10  days,  60 
days  extra.  Many  houses  give  season  datings  of  March  1 
and  September  1,  the  dating  on  suits  in  some  cases  being 
one  month  earlier  than  on  coats.  The  difference  in  prac- 
tice between  New  York  and  Cleveland  with  respect  to 
dating  corresponds  to  the  difference  in  practice  noted  above 
with  respect  to  orders  and  deliveries,  as  there  is  no  heavy 
purchasing  in  advance  in  New  York,  and  goods  are  ordered 
for  delivery  when  needed. 

It  is  stated  that  skirt  manufacturers  in  New  York  who 
are  not  members  of  the  manufacturers'  association  in  gen- 
eral adhere  to  the  terms  adopted  by  the  garment  confer- 
ence, although  they  are  reported  often  to  give  extra  terms. 
Prevailing  terms  among  St.  Louis  houses  are  fairly  uni- 
formly 3  per  cent  10  days,  2  per  cent  30  days,  although 
special  terms  of  8  per  cent  10  days  to  10  per  cent  10  days 
are  allowed  to  firms  of  exceptional  credit.  Jobbers'  terms 
in  the  main  are  2  per  cent  10  days,  net  60  days.  While 
some  members  of  the  trade  claim  that  terms  were  formerly 
flat  3  per  cent,  but  that  about  6  years  ago  eastern  compe- 
tition forced  concessions  during  several  seasons,  terms  on 
the  whole  show  no  great  changes  during  the  past  decade. 
The  city  trade,  which  amounts  to  but  a  small  portion  of 
the  total,  receives  e.  o.  m.  10-day  terms.  In  other  markets 
it  is  reported  that  10  per  cent  10  days  is  largely  given. 

The  standard  maximum  terms  were  not  accepted  by  all 
New  York  City  dress  houses  which  belonged  to  the  dress 


314    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

and  waist  association.  Prior  to  that  time  discounts  ranged 
from  3  per  cent  up  to  as  much  as  16  per  cent  in  some  cases, 
while  10  per  cent  was  called  regular,  as  was  noted  above. 
Terms  of  houses  in  New  York  which  are  not  members  of 
the  local  association,  as  well  as  of  houses  located  in  other 
markets,  vary  greatly,  and  instances  are  found  of  net 
terms  of  10,  30,  and  40  days,  while  discounts  range  from 
2  per  cent  to  8  per  cent,  e.  o.  m.  terms  or  30  days  extra 
being  given  in  some  cases,  as  well  as  graded  discounts  (in 
general  not  over  2)  such  as  2  per  cent  10  days,  1  per  cent 
30  days,  net  60  days,  or  3  per  cent  10  days,  2  per  cent  30 
days,  and  special  terms  according  to  account.  While  many 
state  that  differences  in  terms  are  primarily  due  to  the 
policy  of  the  individual  house,  others  distinguish  between 
cheaper  dresses,  which  are  stated  to  be  generally  sold  on 
shorter  terms  and  lesser  discounts,  and  medium  and  fine 
dresses.  Thus  one  authority  states  the  former  are  sold 
more  largel}''  on  terms  of  net  10  days  or  2  per  cent  10  days, 
the  latter  on  terms  of  8  per  cent  10  days,  in  some  cases 
with  e.  0.  m.  terms  or  30  days  extra,  and  some  extremely 
high-priced  dresses  on  terms  of  8  per  cent  10  days  extra 
or  7  per  cent  10  days,  60  days  extra.  It  is  also  agreed  that 
the  last  few  years  in  general  have  witnessed  a  shortening 
of  terms  and  an  abolition  of  the  old  extremely  high  dis- 
counts. 

Waists  are  generally  sold  on  terms  of  8  per  cent  10  days, 
in  some  cases  with  e.  o.  m.  terms  for  the  better  grade  and 
2  per  cent  10  days  for  the  cheaper  grade.  It  is  stated 
that  there  is  a  general  tendency  to  eliminate  the  60-day 
clause.  Collections  on  the  whole  are  reported  fairly 
prompt,  payment  on  the  average  being  made  within  30 
days  from  receipt  of  goods. 

Fur  Manufacturing." — Raw  and  dressed  furs  are  pur- 

*  Acknowledgment  is  due  Mr.  David  C.  Mills,  Manager,  Associated 
Fur  Manufacturers,  Inc.,  for  reading  this  section. 


THE  APPAREL  AND  LEATHER  INDUSTRIES  315 

chased  by  manufacturers  from  importers  and  dealers.  At 
times  manufacturers  import  their  raw  materials  exten- 
sively, but  the  great  bulk  of  the  business  is  done  through 
dealers.  Both  manufacturers  and  dealers  have  their  raw 
furs  dressed  by  "dressers  and  dyers,"  who  constitute  a 
separate  branch  of  the  industry.  The  business  in  the  past 
has  been  a  one-season  business,  but  in  recent  years  the 
fashion  for  summer  furs  has  given  the  industry  two 
seasons. 

The  matter  of  standardizing  terms  in  the  industry  has 
been  discussed  for  10  years  or  more,  but  no  formal  action 
has  ever  been  taken,  and  it  is  very  generally  conceded  that 
the  establishment  of  fixed  rules  in  regard  to  the  matter 
would  be  extremely  difficult  if  not  entirely  impracticable. 

The  prevailing  terms  are  2  per  cent  10  days  or  7  per 
cent  10  days  December  1,  and  2  per  cent  10  days  January 
1,  on  merchandise  shipped  after  July  1,  and  7  per  cent  10 
days  July  1  on  merchandise  shipped  prior  to  that  date. 
Houses  making  fine  goods  usually  give  7  per  cent  10  days 
with  both  datings,  while  houses  making  cheap  goods  give 
2  per  cent  10  days  December  1  and  7  per  cent  10  days 
July  1.  As  there  are  more  firms  making  cheap  goods  than 
fine,  more  goods  with  the  December  dating  bear  a  2  per  cent 
than  a  7  per  cent  discount.  It  has  been  suggested  that  the 
existence  of  a  7  per  cent  discount  with  the  July  1  dating 
may  be  due  to  the  fact  that  when  the  fur  trade  was  a  one- 
season  business,  special  inducements  were  necessary  to 
stimulate  earlj'-  orders,  and  these  persisted  even  after  the 
industry  had  assumed  a  two-season  character.  Manufac- 
turers have  been  in  a  very  difficult  position  since  1920, 
for  dealers  have  continued  the  terms  of  60  days  and 
dressers  and  dyers  the  terms  of  30  to  45  days  instituted 
during  the  war,  while  manufacturers  have  been  giving 
long  datings  to  retailers. 

Variations  from  these  terms  are,  however,  frequent.    The 


316    THIS  MECHANISM  OF  COMMERCIAL  CREDIT 

customer  with  a  poor  credit  rating  may  have  to  take  a 
lower  discount,  although  this  is  not  generally  practiced. 
Exceptionally  large  discounts,  such  as  6,  8,  10,  12,  and  up 
to  16  per  cent,  are  given  in  certain  cases  where  desired  by 
large  retailers.  Since  1920  much  larger  use  of  the  trade 
acceptance  by  manufacturers  is  reported,  although  it  is 
not  by  any  means  a  general  trade  practice.  Large  use  is 
made  of  it  in  the  purchase  of  skins  from  importers  or 
dealers. 

Prior  to  1912  over  50  per  cent  of  the  total  product  was 
shipped  on  memorandum  or  consignment.  Serious  abuses, 
however,  resulted,  and  in  that  year  a  rule  was  adopted  in 
the  trade  prohibiting  the  practice.  Shipment  of  goods  on 
approval,  to  remain  not  longer  than  3  days  in  the  cus- 
tomer's hands,  is,  however,  permitted.  It  is  estimated  that 
not  over  10  per  cent  of  the  product  at  present  is  shipped 
on  memorandum,  the  greater  part  of  which  is  on  3  days' 
approval. 

Millinery.'^ — The  organization  of  the  millinery  industry 
is  complex.  There  are  four  principal  branches.  Of  these  the 
millinery  jobbers  are  the  chief,  but  the  term  is  somewhat 
inaccurate,  for  many  of  them  make  their  own  hats,  in  large 
part  import  their  specialties,  and  sell  feathers,  etc.,  direct 
to  the  retail  trade.  There  are  also  hat  manufacturers  who 
make  untriramed  and  banded  hats  (which  are  made  by 
machine  and  not  by  hand)  and  who  sell  almost  exclusively 
to  large  jobbers,  or  in  a  very  few  cases  to  large  retailers. 
The  trimmed-hat  houses  manufacture  trimmed  hats  and 
sell  almost  exclusively  to  retail  dealers.  In  addition,  there 
are  specialty  houses  handling  flowers,  feathers,  etc. 

The  hat  manufacturers  who  sell  to  the  jobbers  have  a 
seasonal  business  lasting  from  3  to  4  1/2  months  each 
season.     The  trimmed-hat  manufacturers  have   a  longer 

''  Acknowledgment  is  due  Mr.  Frederick  Bode,  President,  Millinery 
Chamber  of  Commerce  of  the  United  States,  for  reading  this  section. 


THE  APPAREL  AND  LEATHER  INDUSTRIES   317 

season,  owing  to  the  scarcity  of  trimmed  hats,  their  season 
lasting  about  10  months  each  year.  At  the  present  time 
there  is  an  active  and  well-defined  movement  on  foot,  spon- 
sored by  the  Millinery  Chamber  of  Commerce  of  the 
United  States,  looking  toward  the  establishment  of  a  12- 
months'  business  for  all  branches  of  the  millinery  industry, 
with  a  resultant  sale  of  seasonable  millinery  for  each  sea- 
son of  the  year.  It  is  stated  that  this  movement  is  meeting 
with  great  success. 

Terms  of  millinery  jobbers  are  now  fairly  standardized. 
First  among  their  organizations  to  adopt  terms  was  the 
Millinery  Jobbers'  Association  in  1900,  which  now  covers 
the  territory  between  Columbus  and  Denver,  and  St.  Paul 
and  Dallas,  The  terms,  as  revised  in  1910,  called  for  a 
maximum  dating  of  April  15  and  October  15  on  goods 
shipped  prior  to  February  15  and  August  15,  respectively. 
On  goods  shipped  subsequent  to  these  dates  it  was  optional 
with  members  to  allow  60  days  dating,  the  discounts  being 
6  per  cent  10  days,  5  per  cent  30  days,  and  4  per  cent  60 
days  from  value  date.  Anticipation  at  the  rate  of  6  per 
cent  per  annum  was  permitted. 

Beginning  with  the  spring  season,  1918,  datings  were 
fixed  at  April  1  and  October  1  for  shipments  prior  to  Feb- 
ruary 1  and  August  1,  respectively,  while  the  clause  relat- 
ing to  goods  shipped  subsequent  to  these  dates  re- 
mained unchanged.  The  terms  of  4  per  cent  60  days 
were,  however,  eliminated,  and  a  clause  instead  substi- 
tuted providing  that  no  discount  was  to  be  allowed  after 
30  days. 

One  of  the  principal  purposes  in  the  formation  of  the 
National  Millinery  Association  in  the  East,  covering  the 
Atlantic  seaboard  from  Boston  to  Atlanta,  in  the  winter 
of  1917,  was  to  improve  credit  conditions,  in  particular  in 
view  of  the  high  percentage  of  bad-debt  losses.  Prior  to 
that  time  terms  varied  greatly,  but  most  houses  are  stated 


318    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

to  have  given  terms  of  7  per  cent  10  days,  6  per  cent  30 
days,  with  May  1  and  November  1  datings. 

The  datings  and  shipment  dates  fixed  by  the  National 
Millinery  Association  were  identical  with  those  of  the 
Millinery  Jobbers'  Association.  Terms  of  4  per  cent  60 
days  were,  however,  permitted,  no  discount  being  allowed 
after  60  days,  and  terms  of  7  per  cent  10  days  e.  o.  m.  were 
permitted.  At  the  same  time,  a  similar  change  was  made 
by  houses  on  the  Pacific  Coast,  the  datings  being  changed 
from  April  15  and  October  15  to  April  1  and  October  1, 
and  terms  being  specified  as  6  per  cent  10  days,  with  antici- 
pation at  the  rate  of  6  per  cent  per  annum,  or  7  per  cent 
10  days  quoted.  Sixty  days  extra  has  been  given  on  other 
than  early  shipments.  The  problems  which  the  wholesaler 
encounters  have  been  described  as  follows:  "We,  of 
course,  would  like  to  shorten  the  terms  so  as  to  make  our 
accounts  more  liquid,  but,  having  to  deal  very  largely  with 
women  who  have  comparatively  little  capital  and  who  can- 
not pay  their  bills  until  the  season  is  somewhat  advanced 
and  they  actually  do  business,  it  is  useless  to  attempt  to 
make  them  pay  their  bills  on  shorter  terms.  We  receive 
our  money  from  them  as  soon  as  they  begin  to  do  business. 
If  the  season  is  early,  we  get  our  money  early.  When  the 
season  is  late,  it  comes  in  late,  no  matter  what  the  terms 
are." 

The  hat  manufacturers  have  terms,  which  have  been  in 
effect  for  many  years,  of  6  per  cent  10  days,  5  per  cent 
30  days,  with  datings  at  March  1  and  September  1,  and  no 
datings  thereafter,  other  than  e.  o.  m.  terms  in  some  cases. 

Trimmed-hat  houses  on  July  1,  1917,  through  their 
association  adopted  terms  of  6  per  cent  10  days,  60  days 
extra,  or  7  per  cent  10  days.  Terms  previously  in  use 
were  7  per  cent  10  days,  60  days  extra,  or  8  per  cent  10 
days,  and  many  houses  are  still  employing  these  terms. 
In  1919,  several  millinery  jobbers  reported  the  use  of  net 


THE  APPAREL  AND  LEATHER  INDUSTRIES   319 

terms  on  trimmed  hats,  and  a  committee  on  discounts  was 
accordingly  appointed  by  the  Millinery  Jobbers'  Associa- 
tion, but  at  the  convention  it  was  decided  not  to  sell  them 
net. 

Among  the  specialty  items,  flowers  and  feathers  are  sold 
on  terms  of  7  per  cent  10  days,  with  May  1  and  November  1 
dating,  or  10  per  cent  10  days  e.  o.  m. 

The  trade  acceptance  is  little  used  in  the  industry.  It 
was  adopted  in  June,  1919,  by  the  Raw  Ostrich  Feather 
Importers'  Association,  for  use  where  requested  by  the 
seller  on  all  accounts  not  liquidated  by  the  10th  of  the 
month  following  purchase,  terms  being  10  per  cent  10  days 
(e.  0.  m.  in  some  cases),  9  per  cent  30  days,  8  per  cent  60 
days,  7  1/2  per  cent  90  days,  7  per  cent  4  months.  This 
association  urged  the  use  of  trade  acceptances  in  a  letter, 
in  1919,  to  the  Millinery  Jobbers'  Association,  but  the 
latter  did  not  deem  them  practical  for  the  millinery  busi- 
ness at  that  time.  Millinery  braids  were  sold  to  millinery 
jobbers  and  hat  manufacturers  upon  terms  of  6  per  cent 
10  days,  with  datings  of  April  1  and  October  1,  but  practice 
as  to  payments  is  said  to  have  been  very  lax.  On  March  1, 
1920,  purchasers  were  advised  that  the  season  dating  would 
be  eliminated,  and  terms  would  be  8  per  cent  10  days  e.  o.  m. 
or  6  per  cent  10  days  e.  o.  ra.,  60  days  extra,  but  the  effect  is 
stated  to  have  been  nullified  through  instructions  given  by 
customers  to  ship  goods  on  January  1,  makuig  due  dates 
and  discounts  8  per  cent  February  10,  or  6  per  cent 
April  10. 

Tanning.* — The  tanning  industry  is  very  complex. 
There  are  two  principal  branches.  Sole-leather  manufac- 
turers confine  themselves  largely  to  this  branch,  although 
they  also  produce  belting  and  harness  leather  to  some  ex- 
tent.    There  is  a  greater  diversity  in  methods  of  tanning 

"  Aeknovrledgment  ia  due  Mr.  E.  A.  Brand,  Secretary,  Tanners' 
Council,  for  reading  this  section. 


320    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

upper  leather  and  a  tendency  to  specialize  on  making  cer- 
tain classes  and  grades.®  The  product  is  more  varied,  due 
to  a  wider  range  of  uses,  and  there  is  a  larger  num- 
ber of  kinds  of  raw  material.  In  addition  to  produc- 
ing the  various  types  of  upper  leather,  a  few  tanners 
also  include  in  their  production  bag  and  case,  glove, 
fancy,  and  book  leather.  Most  sole-leather  tanners  have 
a  standard  product  for  which  there  is  a  steady  sale, 
consequently  they  produce  considerable  stock  in  advance 
of  orders. 

Leather  is  largely  sold  direct  by  the  tanner  to  the  manu- 
facturer of  leather  products.  Estimates  place  the  propor- 
tion of  leather  sold  direct  at  over  75  per  cent  of  the  total 
output,  these  figures  including  sales  by  tanners  through 
associated  houses  and  subsidiary  companies.  Although  the 
majority  of  firms  from  whom  data  were  received  indicate 
no  change  in  distributive  methods  during  the  past  decade, 
some  tanners  report  an  increasing  tendency  to  sell  direct 
instead  of  through  selling  agents.  The  amount  passing 
through  the  hands  of  leather  dealers  is  very  small.  They 
are  employed  more  largely  in  cleaning  up  job  lots  and  in 
distributing  to  the  smaller  manufacturer.  Wliile  consid- 
erable upper  leather  is  sold  on  consignment,  it  is  under- 
stood that  a  large  quantity  is  sold  outright.  Commission 
merchants  in  recent  years  are  stated  to  be  to  a  considerable 
extent  becoming  direct  owners  of  tanneries,  and  also  hide 
importers  and  dealers.  During  the  war  period  a  consid- 
erable increase  was  noted  in  the  number  of  small  specula- 
tive jobbers.  Among  jobbers,  the  "finders"  are  an  impor- 
tant class,  cutting  up  the  stock  and  selling  the  smaller 
finder,  cobbler,  or  shoe-repair  man  who  is  limited  in  his 
means,  and  carrying  the  large  number  of  articles,  such  as 
thread,  machine  parts,   rubber  heels,   etc.,   which  he  re- 

"  Certain  of  the  data  contained  in  this  article  have  been  taken  from 
Onthank,  The  Tanning  Industry  (Detroit,  1917). 


THE  APPAREL  AND  LEATHER  INDUSTRIES    321 

quires.^"  Leather  belting  is  sold  almost  entirely  direct  by 
tanners  to  the  manufacturers. 

The  tanning  industry  has  no  marked  seasonal  aspect. 
One  tanner  states  that  purchasing  depends  largely  upon 
market  conditions,  business  being  unusually  good  when 
prices  are  firm  and  advancing,  while  less  buying  occurs 
when  prices  are  weak  and  easier.  On  the  whole,  however, 
business  of  the  second  half  year  is  heavier  than  the  first. 
Although  most  tanners  who  furnished  data  report  no 
change  in  this  regard  during  the  past  decade,  some  state 
that  seasonal  fluctuations  are  now  less  pronounced.  One 
tanner  states  that  since  terms  on  sole  leather  were  changed 
about  10  years  ago,  fixed  buying  periods  have  been  largely 
obliterated.  Broadly  speaking,  there  are,  of  course,  two 
seasons,  spring  and  fall,  with  a  short  dull  period  of 
several  weeks  after  each  season.  It  has  been  stated  that 
deliveries  in  October  in  general  are  heaviest,  due  to  the 
fact  that  shoe  manufacturers  are  stocking  up  for  their  next 
run,  as  well  as  to  re-orders  for  midwinter  trade,  while 
activity  is  lowest  about  April  or  later.  This  applies  more 
largely  to  leather  used  by  the  shoe  industry,  which  it  has 
been  estimated  constitutes  about  70  to  80  per  cent  of  the 
total  output. ^^  The  demand  for  belting  leather  is  not  sea- 
sonal, but  varies  according  to  industrial  requirements. 
When  business  is  normal  there  is  a  steady  trade  all  the  year 
around  in  fancy  leather.  Purchases  are  made  in  the  late 
winter  and  early  spring  for  Easter  business,  and  in  the 
late  summer  and  fall  for  Christmas  business,  with  subse- 
quent fill-in  orders,  and  there  is  considerable  buying  for 
advertising  purposes. 

There  are  many  variations  in  terms  of  sale  in  the  indus- 

"  It  is  estimated  that  from  30  to  35  per  cent  of  all  sole  leather 
goes  from  niauufacturers  to  sole  cutters  and  the  shoe-repair  trade. 

"  Data  obtained  by  the  Federal  Trade  Commission  for  the  year 
1918  give  the  output  of  shoe  leather  as  59  per  cent  of  the  total  when 
measured  in  square  feet,  and  74  per  cent  when  measured  in  pounds. 


322   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

try  as  a  whole,  but  in  each  branch  certain  terms  are  recog- 
nized as  regular.  Standard  terms  for  sole  leather  are  4 
per  cent  10  days,  3  per  cent  30  days,  2  per  cent  60  days, 
net  90  days.  A  considerable  number  of  tanners,  however, 
do  not  quote  the  90-day  terms,  while  some  also  omit  the 
60-day  terms.  Twenty  days  extra  is  largely  given,  or  pay- 
ments permitted  by  a  given  date  of  the  following  month, 
such  as  the  10th  or  15tli,  for  the  previous  month's  ship- 
ments. It  has  been  stated  that  the  terms  of  3  per  cent  30 
days  are  practically  ignored.  Certain  tanners  give  no  20 
daJ^s  extra  to  purchasers  taking  60  or  90  days.  Some 
tanners  make  shipments  direct  from  the  tannery  instead  of 
from  warehouses  in  the  larger  centers,  and  in  this  case 
terms  are  often  made  cash  discount  for  payment  on  arrival. 

Terms  were  changed  some  years  ago,  the  general  con- 
sensus of  opinion  placing  the  time  at  about  10  to  12  years. 
Prior  terms  were  5  per  cent  10  days,  4  per  cent  60  days, 
"with  almost  any  dating  a  shrewd  buyer  would  feel  in- 
clined to  exact  under  abnormal  market  conditions,"  and 
the  change  occurred  as  a  result  of  the  strain  upon  the 
tanner's  resources.  At  first  no  20  days  extra  was  given, 
but  this  was  shortly  granted.  It  is  stated  by  several  au- 
thorities that  dating  is  occasionally  permitted  at  present, 
as  for  example,  to  jobbers  in  dull  times.  One  tanner  states 
that  more  recently  there  has  been  considered  the  question 
of  reducing  the  discount  from  4  per  cent  to  2  per  cent, 
which  was  also  attempted  at  the  time  the  change  in  terms 
was  carried  out. 

The  regular  terms  apply  also  on  tanners'  sales  of  cut 
soles,  which  are  produced  by  several  leading  tanners  (as 
well  as  by  specialized  manufacturers),  and  on  rough  belt- 
ing leather.  Finished  belting  leather,  however,  bears 
terms  of  5  per  cent  10  days,  with  4  per  cent  60  days  under 
special  arrangement  to  cover  long  time  in  transit.  Cut 
stock  for  shoe-repairing  purposes  bears  terms  of  1  per  cent 


THE  APPAREL  AND  LEATHER  INDUSTRIES    323 

10  days,  in  some  cases  with  20  days  extra,  and  in  some 
cases  with  net  terms  of  30  or  60  days.  A  leading  tanner 
engaged  in  the  sale  of  cut  stock  to  finders  makes  terms  of 
1  per  cent  10  days,  net  30  days  on  blocks  and  strips,  but 
quotes  4  per  cent  10  days,  2  per  cent  30  days,  net  60  days 
on  other  classes  of  cut  stock. 

Regular  terms  on  upper  leather,  including  glazed  kid 
and  patent  leather,  are  5  per  cent  10  days,  4  per  cent  30 
days.  Considerable  flexibility  exists  with  reference  to  the 
discount  period,  and  monthly  settlement,  ranging  from 
the  1st  to  the  15th,  is  frequent,  while  in  many  cases  30 
days  is  granted.  Under  special  agreement,  with  the  4  per 
cent  discount,  60  days  is  specified  in  a  few  cases  instead 
of  30  days.  It  has  been  reported  that  *'the  New  England 
trade  usually  demand  and  frequently  obtain"  such  terms. 
One  tanner  states  that  *'it  is  not  so  much  a  question  of 
changing  terms  as  making  our  customers  live  up  to  them, ' ' 
while  another  states  that  "terms  of  sale  do  not  seem  to  be 
considered  an  obligation  or  contract  to  most  of  the  shoe 
trade,  and  there  is  tremendous  abuse  in  regard  to  the  time 
taken  in  the  payment  of  bills  and  the  amount  of  discount 
deducted."  It  has  been  stated  that  about  12  years  ago 
an  unsuccessful  effort  was  made  by  certain  tanners  to 
shorten  terms  and  reduce  discounts  on  upper  leather,  while 
another  states  that  some  years  ago  an  effort  was  made  to 
reduce  the  discount  to  4  per  cent.  While  these  are  the 
terms  on  finished  leather,  rough  leather  carries  only  a  1 
per  cent  discount. 

Usual  terms  on  harness  leather  are  2  per  cent  30  days, 
net  60  days  and  in  some  cases  net  90  days,  while  russet 
collar  leather  carries  terms  of  2  per  cent  10  days  and  in 
some  cases  3  per  cent  10  days,  net  30  and  60  days. 

During  the  last  few  years  terms  on  glove  leather  have 
been  shortened  and  discounts  reduced  or  abolished.  At  the 
present  time  they  range  from  net  10  days  to  net  30  days, 


324  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

in  the  latter  case  often  carrying  a  discount  of  1  per  cent 
or  2  per  cent  10  days.  It  is  stated  that  the  great  majority 
of  fancy  leather  manufacturers  employ  terms  of  either  2 
per  cent  10  days,  net  30  days,  or  2  per  cent  30  days.  Ex- 
ceptions noted  are  granting  of  the  discount  on  accounts 
taking  more  than  30  days,  the  quoting  of  net  30- day  terraft 
and  (by  several  smaller  manufacturers)  terms  of  3  per 
cent  30  days.  The  latter  were  the  general  terms  up  to 
several  years  ago.  Purchases  by  fancy  leather  goods  manu- 
facturers from  tanners  producing  chiefly  sole  leather  carry 
the  regular  sole-leather  terms  of  4  per  cent  10  days,  3  per 
cent  30  days.  Coat  leather  is  sold  on  terms  of  net  30  days. 
Customary  book-leather  terms  are  2  per  cent  10  days,  net 
30  days,  and  for  upholstery  leather  2  per  cent  10  days. 

The  trade  acceptance  is  used  only  occasionally  in  the 
industr5^  The  individual  tanner  when  employing  it  at  all 
uses  it  only  on  a  very  small  proportion  of  his  accounts.  A 
leading  tanner  states  that  **  accounts  not  handled  on  a 
discount  basis  are  not  considered  satisfactory,"  and  esti- 
mates that  from  15  to  20  per  cent  of  accounts  run  overdue, 
although  not  seriously,  and  in  a  large  majority  of  cases 
interest  is  added  for  the  overtime.  While  many  tanners 
note  no  difference  in  collections  from  the  various  classes  of 
purchasers,  it  has  been  stated  that  "shippers  generally 
regard  the  shoe  trade  as  more  desirable  than  the  jobbing 
trade."  Collections  from  larger  jobbers  and  finders,  how- 
ever, are  stated  to  be  as  prompt  as  collections  from  shoe 
manufacturers,  and  several  tanners  consider  them  at  times 
more  so,  but  the  smaller  jobbers  and  finders  are  naturally 
less  prompt.  Small  dealers  are  stated  to  obtain  their  sup- 
plies mostly  through  larger  jobbers.  In  the  words  of  one 
tanner,  *'in  most  cases  a  jobber  is  trying  to  do  too  much 
business  on  his  given  capital,  that  is,  he  is  endeavoring  to 
buy  on  extended  terms,  sell  on  a  cash  or  10-day  basis,  and 
turn  his  capital  from  his  customer  to  his  source  of  purchase 


THE  APPAREL  AND  LEATHER  INDUSTRIES    325 

without  great  obligation  on  his  part,  thus  causing  occa- 
sional lack  of  ready  funds,  hence  delayed  payments." 
Several  leading  tanners  state  that  some  shoe  manufac- 
turers at  times  in  the  early  part  of  their  season  when  they 
are  obliged  to  make  and  hold  shoes  for  delivery  dates  are 
inclined  to  be  slower  in  payments  than  ordinarily. 

While  most  authorities  state  that  jobbers'  terms  do  not 
differ  from  tanners',  some  believe  that  dealers'  terms  are 
more  liberal  in  the  time  given,  although  the  standard  dis- 
counts are  the  same.  As  jobbers  sell  to  smaller  accounts, 
which  the  tanners  would  not  solicit,  their  collections  are 
believed  to  be  less  prompt.  Finders'  customary  terms  are 
2  per  cent  10  days,  net  30  days,  although  in  certain  dis- 
tricts longer  net  terms,  such  as  60  days,  are  given.  Their 
collections  are  stated  to  have  greatly  improved  during  the 
last  few  years  with  the  placing  of  the  shoe-repairing  indus- 
try on  a  more  business-like  basis. 

Boots  and  Shoes/- — It  is  estimated  that  approximately 
60  per  cent  of  the  total  output  of  shoes  is  distributed 
through  jobbers,  and,  states  one  authority,  the  percentage 
would  be  even  greater  were  jobbing  houses  owned  by  manu- 
facturers included.  Certain  manufacturers  also  distribute 
goods  from  other  factories  in  addition  to  their  own.  In 
St.  Louis  in  particular,  there  has  been  an  increasing  tend- 
ency during  the  past  decade  for  manufacturers  to  job 
also  shoes  produced  by  other  manufacturers.  Practice  with 
respect  to  sales  to  jobbers  varies  between  the  different 
markets,  and  thus  in  Cincinnati  manufacturers  in  general 
do  not  sell  jobbers,  while  in  Rechester,  where  women's  and 
children's  shoes  are  produced,  the  proportion  is  estimated 
at  40  per  cent.  The  same  manufacturer  ordinarily  does 
not  sell  both  wholesaler  and  retailer.     Heaviest  sales  by 

"  Acknowledgment  is  due  Mr.  Louis  M.  Taylor,  Secretary-Treas- 
urer, National  Shoe  Wholesalers'  Association  of  tlie  United  States, 
for  reading  this  section. 


326   THE  MECHANISM  OP  COMMERCIAL  CREDIT 

manufacturers  are  in  March  and  April  and  in  September 
and  October,  heaviest  production  in  December  to  March 
and  June  to  September,  and  heaviest  shipments  in  Feb- 
ruary to  April  and  August  to  September. 

Terms  on  which  manufacturers  sell  vary  considerably, 
instances  reported  ranging  from  net  10  days  to  discounts 
of  10  per  cent,  one  manufacturer,  for  example,  reporting 
7  per  cent  for  payment  25  days  e.  o.  m.  Distinction  is  made 
by  certain  manufacturers  between  different  types  of  sales. 
One  Cincinnati  house  thus  has  regular  terms  on  goods  to 
be  made  up  of  2  per  cent  10  daj^s,  net  30  days,  to  retailers, 
with  30  days  extra  on  shipments  over  1,000  miles;  5  per 
cent  10  days,  net  30  days,  to  department  stores,  and  6  per 
cent  10  days,  net  30  days,  to  jobbers;  while  net  30  days  is 
quoted  on  goods  sold  from  the  floor  or  out  of  stock.  On 
sales  to  jobbers  the  cash  discount  will  be  stressed,  whereas 
on  sales  to  retailers  the  norm  is  largely  net  terms  of  30 
days,  as  will  be  indicated  below,  although  net  60  days  is 
quoted  by  some  manufacturers."  This  is  reflected  in  the 
difference  in  the  percentage  of  wholesalers  and  retailers 
who  take  the  cash  discount,  estimated  for  the  Rochester 
market  as  80  per  cent  and  50  per  cent  respectively.  A  sub- 
stantial percentage  of  overdue  accounts  is  shown,  several 
houses  stating  that  20  to  25  per  cent  of  retailers  run  be- 
yond the  net  period.  A  shortening  of  t^rms  is  reported 
during  the  past  decade  and  greater  uniformity  has  been 
introduced.  Very  little  use  of  the  trade  acceptance  is  re- 
ported by  manufacturers. 

Due  to  the  fact  noted  above  that  shoe  manufacturers  in 
large  part  also  engage  in  jobbing,  purchasing  other  makes 
and  maintaining  stocks,  little  attention  apparently  has 
been  paid  to  the  terms  upon  which  the  wholesaler  pur- 

"  Little  diflferentiation  is  reported  by  manufacturers  between 
terms  on  which  they  sell  their  own  goods  and  those  of  other  manu- 
facturers which  they  job. 


THE  APPAREL  AND  LEATHER  INDUSTRIES   327 

chases.  This  activity  has  been  confined  more  largely  to 
mbber  and  tennis  footwear,  in  which  a  contract  is  signed 
with  the  manufacturers  for  the  ensuing  year.  Canvas 
footwear  and  tennis  shoes  are  billed  out  on  a  net  due  date 
of  June  15,  and  fall  shipments  of  rubber  boots  and  shoes 
on  November  1,  bearing  terms  of  1  per  cent  10  days  net 
30  days.  It  is  now  being  suggested  that  the  former  dating 
be  changed  to  June  1  for  retailers  and  July  1  for  whole- 
salers. 

Prior  to  1918,  general  terms  of  shoe  wholesalers  were 
largely  net  60  days,  with  considerable  variation  in  the 
cash  discounts  given.  These  ranged  roughly  from  1  per 
cent  10  days  to  5  per  cent  30  days,  but  averaged  2  per 
cent  10  days,  in  some  cases  with  1  per  cent  30  days  quoted 
in  addition  to  the  latter,  for  example,  in  New  England 
largely.  In  the  fall  of  that  year,  upon  the  suggestion  of 
the  Allied  Council  of  the  American  Shoe  and  Leather  In- 
dustries and  Trades,  an  attempt  was  made  to  change  terms 
to  net  30  days,  and  a  movement,  which  had  considerable 
strength,  developed  for  a  discount  of  1  per  cent  10  days. 
The  matter  was  discussed  by  both  thp  National  Association 
and  the  4  constituent  territorial  associations,  each  of  which 
has  had  for  some  years  a  committee  dealing  with  the  sub- 
ject of  terms,  discounts,  and  overdue  accounts,  and  there 
was  general  agreement  as  to  the  desirability  of  these  terms. 
Local  groups  have  also  considered  the  matter,  and  on  vari- 
ous occasions  there  have  been  resolutions  passed  recom- 
mending certain  terms. 

A  survey  made,  in  1919,  by  the  committee  of  the  National 
Association,  and  embracing  159  houses,  showed  that  in  the 
New  England,  Middle  Atlantic,  and  Middle  Western  sec- 
tions there  was  general  adheremce  to  terms  of  30  days, 
although  in  the  South  the  reverse  was  true.  Certain  houses 
made  terms  of  both  30  days  and  60  days.  Less  uniformity 
was,  however,  noted  on  the  question  of  discounts.     While 


328   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

in  New  England  1  per  cent  was  customary,  in  the  Middle 
Atlantic  States  2  per  cent  was  more  frequent,  due  to  the 
fact  that  Philadelphia  and  Baltimore  houses,  with  few  ex- 
ceptions, were  on  a  2  per  cent  basis.  In  the  South  2  per 
cent  was  almost  universal,  while  in  the  Middle  West  the 
number  of  houses  allowing  2  per  cent  was  considerable, 
although  somewhat  less  than  those  allowing  1  per  cent. 
In  the  South  some  houses  reported  the  emj)loyment  of  net 
terms  only,  while  in  the  Middle  West  more  houses  em- 
ployed such  terms  than  granted  a  discount  of  2  per  cent, 
although  the  figure  was  somewhat  less  than  those  granting 
a  discount  of  1  per  cent.  As  a  result  of  its  survey,  the 
committee  stated  that  "very  gratifying  progress  has 
(apparently)  been  made  in  shortening  terms  and  dis- 
counts. ' '  The  movement  continued,  although  exceptions  to 
the  terms  of  1  per  cent  10  days,  net  30  days,  were  still 
found.  With  the  exception  of  the  South,  almost  all  new 
accounts  were  already,  in  1920,  stated  to  be  on  a  1  per  cent 
10-day,  net  30-day  basis. 

Turning  to  the  several  sections,  since  1920  practically  all 
up-state  houses  in  New  York  are  believed  to  be  on  the  new 
basis,  and  some  New  York  City  houses,  in  fact,  have  quoted 
2  per  cent  to  New  York  City  trade  and  1  per  cent  up-state 
and  in  New  England.  In  the  West  terms  were  considered, 
in  1918,  at  several  group  meetings,  the  change  being  in- 
itiated at  St.  Joseph,  and  finally  accomplished  at  a  Chicago 
meeting.  Net  terms  were  fixed  at  30  days,  with  15  days 
extra  for  shipments  of  1,000  miles  or  over.  At  the  Novem- 
ber, 1918  meeting  of  the  Western  Association,  data  ob- 
tained showed  that  three-fourths  the  firms  replying  had 
adopted  the  30-45-day  terms,  most  frequent  discounts  being 
1  per  cent,  2  per  cent  and  absolutely  net.  A  resolution  was 
passed  favoring  the  elimination  of  the  cash  discount  and 
making  the  terms  net  30  or  45  days,  with  latest  shipping 
dates  on  white  goods  or  low  shoes  April  1,  as  a  concession 


THE  APPAREL  AND  LEATHER  INDUSTRIES    329 

to  northwestern  houses.  While  the  Southern  Association 
has  considered  the  matter  of  terms  since  about  1918,  the 
same  success  does  not  appear  to  have  attended  its  efforts 
as  has  been  the  case  with  the  other  associations.  It  is  gen- 
erally agi-eed  that  the  change  in  terms  has  been  made  with 
little  difficulty,  and  that  there  has  been  no  adverse  effect 
upon  business.  There  has  also  been  the  saving  in  the  dis- 
count, in  addition  to  more  rapid  inflow  of  funds,  and  cor- 
responding reduction  in  bank  borrowings.  An  aid  thereto, 
of  course,  has  been  the  merchandising  situation  in  the 
industry.  At  the  present  time,  there  is  some  disposition  to 
fall  away  from  the  1  per  cent  10-day  discount. 

Advance  orders  have  always  been  taken,  although  it  is 
stated  from  New  England  that  the  seasonal  aspect  of  the 
industiy  has  been  less  marked  during  the  last  few  years, 
due  to  active  consumption  and  more  frequent  purchasing. 
Orders  are  taken  for  shipment  on  a  given  date,  with  the 
seller  retaining  the  privilege  of  prior  shipment,  in  which 
case  the  goods  are  billed  as  of  the  date  called  for  in  the 
order  in  place  of  date  of  shipment,  and  carry  the  usual 
terras.  Time  of  shipment  varies  somewhat,  and  likewise 
the  "dating"  granted.  Spring  shipments  in  general  will 
be  made  from  December  on,  January,  February,  and 
March  being  the  heaviest  months,  and  the  most  frequent 
datings  are  March  1  and  April  1,  although  February  1 
and  May  1  may  also  be  granted.  Fall  shipments  in  general 
will  be  made  from  May  on,  July,  August,  and  September 
being  the  heaviest  months,  and  the  most  frequent  datings 
are  September  1  and  October  1,  although  August  1  and 
November  1  may  also  be  granted.  Certain  houses  have 
eliminated  the  season  dating  entirely. 

Considerable  interest  has  been  manifested  in  the  trade 
acceptance,  and  some  educational  work  has  been  under- 
taken by  the  associations,  but  little  use  on  the  whole  is 
made  of  the  instrument.    In  1918,  of  62  middle  western 


330   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

houses,  16  were  using  it  with  satisfactory  results,  while 
13  were  desirous  of  employing  it,  but  considerable  lack  of 
knowledge  of  its  proper  use  was  found,  as  well  as  lack  of 
interest  due  to  shortness  of  terms  and  fear  of  loss  of  busi- 
ness through  non-universality  of  its  use. 

As  noted  above,  the  committees  of  the  national  and  con- 
stituent associations  deal  with  overdue  accounts  as  well  as 
terms  and  discounts.  The  practice  of  charging  interest  on 
overdue  accounts  is  widespread  in  certain  sections,  being 
reported  as  general  in  New  England.  Particular  interest 
has  been  manifested  bj''  the  Western  Association,  only  9 
out  of  67  reports  to  it  in  1918  showing  no  interest  charged, 
while  in  1919  the  proportion  had  fallen  to  3  out  of  40. 


CHAPTER  XVI 

THE  LUMBER  AND   MISCELLANEOUS  MANUFACTURING 
INDUSTRIES 

The  present  chapter  deals  with  a  miscellaneous  group 
of  industries.  The  articles  are  of  various  kinds,  and  the 
factors  governing  terms  differ  accordingly.  Two  of  them, 
that  is,  lumber  and  jewelry,  especially  show  the  influence 
of  general  competitive  conditions.  In  both  the  actual  terms 
in  use  lack  uniformity,  and  payments  tend  to  vary  accord- 
ing to  the  needs  of  the  particular  buyer.  In  lumber  there 
is  marked  variation  according  to  the  condition  of  the 
market,  terms  being  on  a  satisfactory  basis  when  the  selling 
manufacturers  and  wholesalers  control  the  situation,  and 
weakening  as  a  buyers'  market  develops.  They  are,  how- 
ever, relatively  short,  being  about  2  per  cent  5  days  after 
arrival,  net  60  or  90  days.  On  the  other  hand,  the  retail 
jeweler  is  engaged  in  a  distinctly  seasonal  business  and 
needs  to  be  carried  until  he  sells  part  of  his  merchandise. 
He,  therefore,  is  granted  regular  terms  of  6  per  cent  4 
months  or  season  settlement. 

The  other  industries  considered  have  on  the  whole  few 
distinguishing  features.  Paint  and  varnish  and  glass  terms 
are  largely  either  1  per  cent  10  days,  net  30  days  or  2  per 
cent  10  days,  net  60  days.  The  quoted  drug  and  paper 
terms,  on  the  other  hand,  generally  do  not  run  beyond  30 
days,  being  either  1  per  cent  or  2  per  cent  10  days  with 
net  terms  of  30  days,  although  in  a  considerable  part  of 
the  paper  business  they  are  also  2  or  8  per  cent  80  days. 
A  conspicuous  exception  is  wall  paper,  which  is  strictly 

331 


332  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

seasonal  and  carries  a  dating  together  with  graded  terms. 

Lumber.^ — An  outstanding  feature  of  the  lumber  indus- 
try for  the  present  purpose  is  the  complexity  of  its  or- 
ganization. It  is  estimated  that  there  are  over  40,000 
manufacturers,  ranging  all  the  way  from  the  small  portable 
mill,  which  may  operate  on  either  virgin  timber  or  second 
growth,  to  the  large  mill  operating  on  extensive  bodies  of 
virgin  timber.  Similarly,  there  are  a  large  number  of 
wholesalers  and  retailers.  As  a  result,  wide  variations  in 
selling  and  financing  methods  have  always  been  found,  and 
changes  occur  from  time  to  time  as  business  conditions 
change.  There  is  no  conspicuous  difference  between  the 
different  kinds  of  wood,  in  spite  of  certain  differences  in 
demand  and  the  varied  problems  of  production,  as  all 
manufacturers  and  wholesalers  come  into  competition  with 
each  other  to  a  greater  or  lesser  extent.^ 

Prior  to  1921,  the  recommended  terms  were  prepared  by 
the  individual  associations,  but  in  that  year  the  American 
Lumber  Congress  adopted  a  resolution,  which  it  reaffirmed 
in  1922,  recommending  certain  terms  to  the  manufac- 
turers', wholesalers'  and  retailers'  associations,  as  follows: 
"Freight,  net  cash.  Balance  of  invoice  subject  to  2  per 
cent  discount  if  paid  within  5  days  after  arrival  of  car, 
or  net  if  either  closed  within  5  days  after  arrival  by  note 
or  trade  acceptance  due  90  days  from  date  of  invoice  and 
bill  of  lading,  or  if  running  on  open  account  for  60  days. 
In  the  last  case,  subject  to  sight  draft  65  days  after  date 
of  invoice."    Competition  is  so  keen  to-day,  however,  that 

*  Acknowledgment  is  due  Mr.  W.  W.  Schupner,  Secretary,  National 
Wholesale  Lumber  Dealers'  Association,  and  Mr.  Wilson  Compton, 
Secretary-Manager,  National  Lumber  Manufacturers'  Association, 
for  reading  this  section. 

*  One  authority  believes,  however,  that,  as  the  value  of  the  average 
carload  of  hard  wood  is  considerably  in  excess  of  that  of  a  carload 
of  soft  wood,  and  as  many  of  the  consumers  of  hard  woods  are  in 
business  in  a  small  way  and  with  limited  capital,  in  actual  practice 
more  liberal  terms  are  extended  on  hard  woods. 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES    333 

"manufacturers  and  wholesalers  are  finding  it  difficult  to 
transact  their  business  on  the  basis  of  terms  which  they 
think  should  prevail."  On  the  other  hand,  in  1920  "mills 
did  a  great  deal  of  business  on  a  cash-with-order  basis." 

In  discussing  in  greater  detail  the  terms  of  the  indi- 
vidual associations,  it  will  be  well  to  consider  separately 
the  manufacturer's  situation  and  the  wholesaler's  situation. 

Manufacture. — Manufacturers'  terms  have  been  substan- 
tially of  three  general  classes.  First  are  those  calling  for 
part  cash  with  order  and  the  balance  on  receipt  of  notice  of 
shipment.  Such  terms  are  used  by  the  very  small  operator 
without  yards,  who  puts  his  product  in  transit  as  soon  as 
cut.  Second  are  terms  embodied  in  special  contracts  drawn 
to  cover  a  considerable  period  of  time.  This  form  is 
usually  employed  between  large  mills  and  wholesalers  and 
manufacturers  of  products  such  as  furniture,  where  these 
manufacturers  receive  their  entire  supply  of  raw  material 
from  the  mills  in  question.  These  terms  vary  according 
to  the  individual  case. 

The  terms  recommended  by  certain  of  the  larger  manu- 
facturers' associations,  which  have  interested  themselves 
in  the  subject  during  the  past  10  years,  provide  the  third 
class,  but  deviation  from  them  has  been  frequent.  The 
cash  discount  specified,  in  particular  by  eastern  and  south- 
ern associations,^  has  been  2  per  cent  10  days  or  15  days 
from  date  of  invoice  on  the  net  amount  of  the  invoice  after 
deduction  of  freight,*  in  some  cases  if  the  remittance  is 
mailed  within  that  time.^    While  for  many  years  15  days 

*  One  association  provided  for  discount  for  payment  on  receipt  of 
invoice.  Several  other  associations  reported  these  discounts  generally 
in  use  among  their  membership. 

*  A  delivered  price  is  generally  quoted,  and  deduction  of  the  freight 
by  the  purchaser  permitted. 

"With  a  relatively  few  producers  the  discount  is  li  per  cent, 
and  in  only  one  section  may  it  be  said  to  be  practiced  in  a  terri- 
torial way,  namely  Buffalo  and  Tonawanda,  and  there  it  is  largely 
confined  to  sales  through  New  York  State. 


334  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

was  the  universal  discount  period,  it  is  stated  that  the 
western  producers  found  themselves  handicapped  by  this 
arrangement,  due  to  the  fact  that  cars  were  in  transit  from 
15  to  30  days,  and  as  they  got  farther  and  farther  east 
with  their  product  and  railroad  congestion  increased,  de- 
livery took  60  days  or  more,  whereas  in  the  South  and  East 
rail  delivery  was  usually  secured  within  the  15-day  period. 
As  a  result,  the  discount  period  was  not  as  strictly  observed 
by  the  western  shippers.  The  majority  of  the  western 
associations,  as  well  as  one  northern  and  one  southern  asso- 
ciation,® have  therefore  had  instead  a  clause  permitting 
the  cash  discount  for  payment  within  5  days  after  arrival 
of  the  car,  in  general  as  evidenced  by  the  paid  freight  bill. 
Toward  the  close  of  1917,  three  of  the  western  and  northern 
associations,  in  the  belief,  it  is  stated,  that  terms  would 
ultimately  be  entirely  on  a  net  basis  and  that  a  2  per 
cent  discount  was  excessive,  reduced  the  discount  in  their 
recommended  terms  to  1  per  cent.  Great  difficulty,  how- 
ever, was  experienced,  and  the  former  discount  was  re- 
stored after  about  a  year.  In  several  cases  1  per  cent  30 
days  from  date  of  invoice  has  also  been  specified,  and  in  the 
case  of  one  southern  association,  which  had  terms  calling 
for  2  per  cent  within  5  days  after  arrival  of  car,  the  1  per 
cent  was  given  for  payment  within  30  days  after  arrival 
instead  of  invoice  date. 

Standard  net  terms  have  been  60  days  from  date  of 
invoice,  although  in  a  few  cases  where  no  terms  have  been 
recommended  it  is  reported  that  30  days  have  been  given 
instead.  In  certain  cases  provision  has  been  made  for  a 
trade  acceptance,'  and  several  associations  have  specified 
that  it  be  mailed  within  a  certain  number  of  days,  such  as 


"  One  western  association  stated  that  1  per  cent.  5  days  after 
arriA'al  was  in  general  use  among  its  membership. 

'  Another  association  also  reported  the  use  of  the  trade  acceptance 
to  cover  the  net  period. 


LUMBER  AND  MISCELLANEOUS  LNDUSTRIES    335 

10  or  15,  after  the  invoice  date.  One  association  permitted 
90  days  with  a  trade  acceptance  as  against  60  days  with  a 
note  settlement.  Difficulty  arises  in  case  a  buyer  wishes  to 
discount  his  bill,  but  has  not  as  yet  received  the  shipment. 
Largely  in  the  West  and  vSouth,'*  a  clause  has  been  included 
to  govern  terms  in  the  event  of  non-arrival  of  the  ear  within 
a  certain  period,  either  the  discount  period,  where  this  is 
a  specified  number  of  days  after  date  of  the  invoice,  or 
where  this  period  is  5  days  after  the  arrival  of  the  car, 
within  30  days  or  the  net  period  of  60  days.  In  this  event 
it  has  usually  been  provided  that  90  per  cent  of  the  invoice, 
less  the  estimated  freight  (the  actual  figure  for  which, 
however,  is  given  by  many  shippers)  shall  be  paid,  and  the 
balance  be  due  on  arrival  and  inspection.  In  certain  cases, 
principally  in  the  West,  a  provision,  however,  has  been 
inserted  prohibiting  the  deduction  of  the  discount  when 
payment  is  not  made  within  a  specified  number  of  days 
after  the  date  of  the  invoice,  in  certain  cases  30  days  and 
in  other  cases  60  days.® 

Wholesale. — A  study  published  in  1918  stated  that 
"there  has  been  a  marked  tendency  in  recent  years  to 
increase  the  sales  of  lumber  from  the  sawmill  direct  to 
the  larger  consumer,  or  retail  yard."  ^°  Wholesalers,  how- 
ever, state  more  recently  that  the  high  prices  since  pre- 
vailing and  the  increased  cost  of  doing  business  haa 
resulted  in  mills  seeking  the  wholesalers,  and  increased  the 
proportion  of  business  done  through  them.  The  practice 
varies  with  the  different  localities,  60  per  cent  of  the  out- 
put of  southern  pine,  for  example,  being  sold  direct,  chiefly 

*  Another  association  also  reported  use  of  the  clause  by  its  mem- 
bership. 

•  One  association  specifying  30  days  stated  that  the  arrangement 
had  been  provided  "to  allow  sufficient  time  for  the  shipper  to  render 
invoices  and  tally  sheets  and  for  the  consignee  to  receive,  check  and 
make  remittances  and  take  advantage  of  the  discount." 

'"Dodd,  Lumbering   (Detroit,  1918),  p.  13. 


336   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

by  large  mills,  while  on  the  West  Coast  the  figure  is  but 
20  per  cent.  Considering  the  type  of  purchaser,  a  leading 
authority  has  given  the  following  estimates  of  the  propor- 
tions of  business  done  by  lumber  manufacturers  and  whole- 
salers with  retailers,  planing  mills,  and  manufacturing  con- 
sumers. In  this  compilation,  the  planing  mill  percentage 
is  separated  from  the  general  retail  business,  although  it  is 
very  common  for  a  retail  lumber  yard  to  operate  a  planing 
mill. 


Section 


New  England 

Middle  Atlantic  States.. 
Southern  Atlantic  States 

Central   States 

Western  States 


Planing 

Retail 

mill 

Per  cent 

Per  cent 

50 

20 

45 

25 

35 

30 

60 

10 

40 

30 

Manufac- 
turing 
con- 
sumers 


Per  cent 
SO 
30 
35 
30 
30 


Two  leading  middle  western  wholesalers,  however,  state 
that  the  trade  of  wholesalers  with  retailers  is  a  relatively 
small  part  of  the  ^business  in  that  section,  although  it  is 
believed  that  in  the  East  the  reverse  is  the  case,  and  one 
estimates  that  60  to  70  per  cent  of  wholesalers'  sales  in  his 
territory  are  to  manufacturing  consumers. 

Standard  recommended  terms  were  first  adopted  by  the 
National  Wholesale  Lumber  Dealers'  Association  in  1902. 
These  terms  provided  for  net  cash  payment  of  freight,  the 
balance  to  be  settled  for  by  note  at  60  days  from  date  of 
invoice,  or  less  1  1/2  per  cent  if  paid  within  15  days  from 
date  of  invoice  or  1  per  cent  30  days.  No  discount  was  to 
be  allowed  after  30  days,  but  in  the  event  of  non-receipt  of 
car  within  the  discount  periods,  prepayment  was  not  held  to 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES    337 

forfeit  the  right  to  make  corrections.  These  terms  were 
re-affirmed  at  subsequent  conventions,  although  there  had 
gradually  come  about  widespread  deviation  from  them.  In 
1917,  the  committee  on  terms  of  sale  unsuccessfully  recom- 
mended the  recognition  of  existing  conditions  and  instead 
the  adoption  of  terms  calling  for  a  note  at  90  days  from 
date  of  invoice,  with  a  discount  of  2  per  cent  if  paid  within 
10  days  from  date  of  arrival  of  car.  It  was  stated  that 
terms  at  that  time  were  in  many  cases  2  per  cent  30  days, 
net  90  days,  from  date  of  shipment,  which  were  first  insti- 
tuted in  the  case  of  shipments  to  a  distance  in  view  of  the 
time  the  shipment  was  in  transit. 

Several  of  the  retailers'  associations  have  interested 
themselves  in  terms,  and  adopted  recommended  terms  on 
which  their  members  purchase.  While  this  has  been 
most  prominent  in  the  metropolitan  district,  it  is  stated 
that  such  terms  have  been  adopted  among  others  in  New 
England,  New  York  State,  New  Jersey,  Ohio,  Pennsyl- 
vania, and  Illinois.  ' '  The  main  point  in  contention, ' '  states 
one  authority,  "is  that  the  retailer  would  like  to  buy  at  a 
certain  time  from  arrival,  whereas  the  wholesaler  endeavors 
to  insist  (in  order  to  definitely  fix  the  date)  on  the  time 
being  based  from  date  of  shipment.  The  reason  for  this 
contention  has  been  the  great  delay  since  the  war  in  lum- 
ber coming  through."  The  recommended  terms  of  the 
New  York  (City)  Lumber  Trade  Association  call  for  2  per 
cent  10  days  from  date  of  arrival  or  note  due  3  months 
from  date  of  arrival,  and  a  considerable  amount  of  lumber 
has  been  bought  on  these  terms,  while  net  4  months  from 
arrival  has  also  been  employed. 

After  a  conference  with  representatives  of  other  lumber 
trade  organizations,  standard  recommended  terms  were 
prepared  by  the  committee  on  terms  of  sale  of  the  whole- 
salers' organization,  and  adopted  at  the  1920  convention. 
These  terms  called  for  net  cash  60  days  from  date  of  in- 


338  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

voice,  or  less  2  per  cent  if  paid  within  15  days  from  date 
of  invoice,  or  1  per  cent  if  paid  within  30  days.  Settle- 
ment by  note  or  trade  acceptance  was  permitted  at  90  days 
from  date  of  invoice,  same  to  be  mailed  within  10  days 
after  arrival  of  car.  In  the  event  of  non-arrival  of  the  car 
within  the  discount  period  deduction  of  the  discount  was 
permitted  for  payment  within  the  discount  period  of  80 
per  cent  of  the  net  amount  of  the  invoice  (estimated  freight 
deducted),  the  balance  to  be  paid  within  10  days  after 
arrival  and  unloading,  but  if  not  so  paid  the  discount  was 
to  be  credited  only  on  the  amount  paid  within  the  discount 
period.  The  provisions  as  to  freight  and  non-forfeiture  of 
the  right  to  make  corrections  were  again  inserted,  as  well 
as  the  30-day  discount  limit.  Among  variations  from  these 
terms,  it  should  be  noted  that  eastern  lumber,  manufac- 
tured in  New  England  and  the  Canadian  Provinces,  for 
many  years  has  been  generall}^  sold  on  special  terms  of  1 
per  cent  10  days  from  date  of  invoice,  or  net  30  days. 

In  the  industry,  v>'hile  net  terms  in  certain  cases  are  on 
open  account,  they  are  more  frequently  covered  by  a  note. 
Within  the  last  few  years,  the  committee  on  terms  of  sale 
of  the  National  Wholesale  Lumber  Dealers'  Association  has 
advocated  the  use  of  the  trade  acceptance,  and  its  standard 
terms  were  changed,  in  1919,  by  providing  for  the  use  of 
either  trade  acceptance  or  note  where  net  terms  were  em- 
ployed. The  committee  stated,  in  its  1920  report,  that 
according  to  the  information  which  it  had,  the  use  of 
the  instrument  was  growing  rapidly.  It  was  stated, 
however,  that  certain  retailers  in  the  larger  cities  who  do 
not  discount  endeavor  to  force  the  use  of  the  open  account, 
and  frequently  run  beyond  the  90-day  net  period. 

OflBce  Furniture  and  Store  Fixtures. — Office  furniture  is 
largely  sold  by  the  manufacturer  direct  to  the  retailer.^  ^ 

"■  Acknowledgment  is  due  Mr.  J.  Arthur  Witworth,  Manager,  Asso- 
ciated   Office    Fiujiiture    Manufacturers,    for    reading    this    material. 


LmiBER  AND  MISCELLANEOUS  INDUSTRIES    339 

Manufacturers  of  certain  lines — particularly  filing  equip- 
ment— however,  have  chains  of  stores  through  which  their 
product  is  retailed.  Store  fixtures  are  largely  sold  through 
agents,  but  are  sold  direct  by  some  manufacturers. 

The  cash  discount  granted  on  office  furniture  usually 
ranges  from  2  to  5  per  cent  for  payment  within  10  or  20 
days,  while  carload  lots  carry  a  discount  of  from  3  to  5  per 
cent.  A  tightening  up  of  terms  and  decrease  in  the  maxi- 
mum cash  discount  period  is  reported  within  the  past  5 
to  10  years.  The  percentage  of  accounts  taking  the  cash 
discount  appears  higher  than  for  home  furniture,  several 
firms  reporting  as  high  as  95  per  cent. 

Very  few  firms  engaged  in  the  manufacture  of  store  fix- 
tures at  the  present  time  give  any  cash  discount  on  their 
product,  and  only  a  few  firms  building  special  lines  of 
fixtures  still  give  a  cash  discount  of  from  2  to  5  per  cent.^^ 
The  standard  terms  in  the  industry  are  net  30  days,  and  a 
very  large  proportion  of  the  business  is  done  on  these 
standard  terms.  A  small  proportion  of  the  business  is  done 
on  the  deferred-payment  plan.  In  this  case  an  advance 
payment  of  usually  from  20  to  30  per  cent  is  required, 
with  a  total  payment  of  from  40  to  50  per  cent  before  the 
goods  are  actually  delivered.  The  total  time  given  seldom, 
if  ever,  exceeds  12  months.  A  large  proportion  of  the 
deferred-payment  business  does  not  carry  over  8  months' 
time,  and  many  firms  give  no  more  than  6  months. 

The  amount  of  deferred-payment  business  has  been 
gradually  decreasing  for  several  years,  sales  made  on  the 
standard  terms  having  increased  correspondingly.  Prior 
to  1913,  a  large  proportion  of  the  business  was  done  on 
the  deferred-payment  plan,  2  or  3  years'  time  often  being 
given,  and  cash  discounts  were  also  very  common.     The 

"Acknowledgment  is  due  Mr.  F.  C.  Luces,  Secretary,  National 
Commercial  Fixture  Manufacturers'  Association,  for  reading  tliia 
material. 


340   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

practice  of  giving  this  long  time,  however,  it  is  reported, 
has  now  been  almost  entirely  discontinued,  and  the  business 
is  stated  to  be  on  by  far  the  best  basis  as  to  terms  that  it 
ever  has  been. 

Paint  and  Vamish.^^ — Both  paints  and  varnishes  in 
many  cases  are  produced  by  the  same  manufacturers,  while 
both  are  distributed  largely  through  the  same  jobbers,  and 
a  close  relation  exists  between  their  use.  Varnish  terms 
tend  to  conform  to  those  on  paint.  Of  the  total  output  of 
paint,  it  is  estimated  that  60  per  cent  is  sold  by  manufac- 
turers direct  to  industrial  consumers,  such  as  manufactur- 
ing plants  and  railways,  while  40  per  cent  is  sold  to  whole- 
sale and  retail  dealers  and  to  painters  direct.  On  the 
whole,  there  are  very  few  exclusive  paint  jobbers,  and  glass 
or  hardware  is  handled,  many  of  these  dealers  being  either 
hardware  jobbers  or  wholesale  druggists. 

Terms  generally  prevailing  with  paint  manufacturers 
for  many  years  have  been  2  per  cent  10  daj^s,  net  60  days. 
At  the  close  of  1918,  a  resolution  was  adopted  by  the 
national  association  favoring  a  change  in  the  terms  to 
dealers  to  1  per  cent  10  days,  net  30  days,  to  be  effective 
April  1,  1919.  An  effort  was  made  by  some  of  the  larger 
houses  to  put  these  terms  in  force,  but  the  attempt  was 
abandoned,  as  the  general  consensus  of  opinion  proved  to 
be  decidedly  against  the  reduction.  While  hardware  job- 
bers were  decidedly  against  such  a  change,  which  would 
bring  the  paint  terms  "out  of  line"  with  those  on  which 
they  purchased  the  remainder  of  their  merchandise,  the 
terms  have  been  favored  for  several  years  by  the  wholesale 
druggists,  whose  standard  purchasing  and  selling  terms 
they  are.  In  accordance  with  a  recommendation  made 
about  a  year  previously,  terms  to  manufacturers  and  other 

"  Acknowledgment  is  due  Mr.  G.  B.  Heckel,  Secretary-Treasurer, 
Paint  Manufacturers'  Association  of  the  United  States,  for  reading 
this  section. 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES    341 

industrial  consumers  are  generally  1  per  cent  10  days,  net 
30  days,  in  particular  by  the  larger  houses.  Railroads, 
however,  receive  net  cash  terms,  at  least  from  the  larger 
manufacturers. 

The  varnish  industry  in  the  past  has  been  noted  for  long 
terms  and  for  the  looseness  with  which  even  the  prevailing 
terms  were  enforced.  During  the  last  10  years,  manu- 
facturers' terms  were  generally  reduced  to  5  per  cent  30 
days,  net  4  months.  Within  the  last  6  or  7  years  these 
terms  have  been  further  reduced  to  2  per  cent  10  days,  net 
60  days.  These  were  the  prevailing  paint  terms,  and  many 
paint  manufacturers  were  adding  varnish  plants,  while 
conversely  many  varnish  manufacturers  were  commencing 
to  manufacture  paint.  It  is  estimated  that  at  present  75 
or  80  per  cent  of  the  varnish  sold  to  dealers  carries  these 
terms,  while  to  manufacturing  plants,  railways,  etc., 
the  terms  are  shorter  still.  A  general  tendency  to  sell  on 
net  terms  is  reported,  as  well  as  to  shorten  terms  and  make 
terms  and  discounts  more  uniform.  A  considerable  amount 
of  varnish,  however,  is  still  sold  on  the  old  4  months '  terms, 
in  particular,  it  is  believed,  to  the  carriage  trade. 

Both  the  paint  and  varnish  manufacturers'  associations 
approved  the  use  of  trade  acceptances  as  far  as  possible,  to 
be  eifeetive  January  1,  1919,  but  the  instrument  thus  far 
has  been  used  only  to  a  very  limited  extent. 

Jobbers'  terms,  which  have  been  in  effect  for  many  years, 
are  2  per  cent  10  days,  net  60  days,  for  varnish  and  mixed 
paints.  White  lead  and  linseed  oil  bear  terms  of  1  per  cent 
10  days,  net  30  days,  changed  in  the  case  of  white  lead 
since  1917,  from  2  per  cent  10  days,  net  60  days,  and  tur- 
pentine bears  net  30  days.  Dry  paints  are  generally  sold 
on  terms  of  1  per  cent  10  days,  net  30  days. 

Glass  and  Glassware.^* — Manufacturers  of  glass  products 

"  Acknowledgment  ia  due  Mr.  J.  B.  Johnston,  Jr.,  Vice-President, 
Johnston   Brokerage   Co.,   Pittsburgh;    Mr.   John   Kunzler,   Actuary, 


342  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

sell  largely  to  jobbers,  who  usually  have  an  exclusive  terri- 
tory, and  to  consuming  manufacturers  in  other  industries 
who  use  glass  products.  In  the  case  of  bottles  and  jars,  a 
large  quantity  is  sold  to  manufacturers  of  various  food 
products,  and  it  is  estimated  that  from  75  to  90  per  cent 
of  the  output  is  sold  to  industrial  consumers,  the  balance 
distributing  itself  between  wholesalers  and  retailers.  Plain 
prescription  ware  alone  is  sold  to  jobbers.  Jobbers  of  plate 
and  window  glass  sell  to  contractors  and  manufacturers  of 
building-construction  material  as  well  as  to  retailers.  Only 
a  small  amount  of  glassAvare  is  sold  direct  to  the  retailer, 
the  nature  of  the  product  limiting  such  sales  to  cut  glass, 
tableware,  some  light  goods,  and  a  few  specialties.  In- 
creased capacity  on  the  part  of  some  manufacturers  of 
glassware  has  reduced  the  operating  period  in  certain  lines 
to  6  and  7  months.  It  is  stated  that  there  has  been  a  tend- 
ency to  shift  the  responsibility  for  stocking  the  product 
to  the  manufacturer.^^ 

Regular  terms  of  glass  manufacturers  are  largely  1  per 
cent  10  days,  net  30  days.  This  has  been  the  case  with 
plate  glass  for  20  years  or  more,  window  glass  since  De- 
cember 5,  1916,  bottles  for  15  years,  and  with  ornamental 
glass  ware.  The  same  terms  apply  to  flint  and  lime  glass 
(pressed  and  blown  ware)  since  January,  1916,  and  for 
blanks  for  cut  glass,  except  that  the  discount  period  is  15 
days.  Cut  glass  since  T)ecember,  1918,  however,  carries 
terms  of  1  per  cent  30  days,  net  60  days.  Former  terms 
on  flint  and  lime  glass,  ornamental  glassware  and  cut  glass 

American  Association  of  Flint  and  Lime  Glass  Manufacturers,  Inc.; 
Mr.  Charles  H.  Ferris,  Assistant  Business  Manager,  National  Bottle 
Manufacturers'  Association  of  the  United  States  and  Canada;  Mr. 
T.  P.  Strittmayer,  Quaker  City  Cut  Glass  Co.,  Philadelphia;  and 
Mr.  North  Storms,  Secretary,  National  Glass  Distributors'  Associa- 
tion, for  reading  parts  of  this  section. 

"  Certain  of  the  data  in  this  paragraph  have  been  taken  from 
United  States  Bureau  of  Foreign  and  Domestic  Commerce,  Miseel- 
laneoua  Series  No.  60. 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES    343 

were  2  per  cent  30  days,  net  60  days,  and  on  window  glass 
2  per  cent  10  days,  net  60  days. 

The  bulk  of  sales  of  plate  and  window  glass  and  orna- 
mental glassware  are  made  to  jobbers,  who  discount  their 
bills.  Various  estimates  put  the  proportion  of  discounted 
bills  of  manufacturers  of  flint  and  lime  glass  at  one- 
third  to  two-thirds  (in  amount,  not  number)  and  the 
balance  take  from  30  to  45  or  60  days.  'Normally,  ap- 
proximately 75  per  cent  of  invoices  of  bottle  manufac- 
turers are  discounted,  and  60  per  cent  of  those  of  cut  glass 
manufacturers. 

The  trade  acceptance  is  not  employed  in  the  majority  of 
the  branches  of  the  industry,  in  particular  for  plate  and 
window  and  cut  glass.  Its  use  in  connection  with  orna- 
mental glassware  is  very  limited,  as  is  also  the  case  with 
bottle  manufacturers.  Certain  of  the  latter  grant  60  days 
or  90  days  in  place  of  30  days  where  the  acceptance  is 
employed.  A  leading  manufacturer  of 'pressed  and  blown 
glassware  estimates  that  4  per  cent  of  his  accounts  (in 
amount,  not  number)  have  been  covered  by  trade  accept- 
ances. 

Jobbers  or  distributors  of  plate  and  window  glass  also 
sell  on  terms  of  1  per  cent  10  days  from  date  of  shipment, 
net  30  days.  These  terms  have  been  applied  to  plate  glass 
for  many  years,  and  were  applied  about  4  years  ago  to 
window  glass,  following  the  similar  change  in  manufac- 
turers' terms  from  2  per  cent  10  days,  net  60  days.  It  is 
stated  that  occasionally  contractors  are  permitted  to  pay 
85  to  90  per  cent  of  the  contract  price  by  the  10th  of  the 
month  for  the  preceding  month's  deliveries.  Trade  accept- 
ances are  not  generally  used  by  distributors  except  'in 
settlement  for  carload  shipments. 

Jewelry.^® — Twenty-five  or  more  years  ago,  regular  terms 

"  Acknowledgment  is  due  Mr.  Sidney  Y.  Ball,  President,  Norris 
Alister-Ball  Co.,  Chicago,  for  reading  this  section. 


344  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

of  jewelry  manuf^turers  were  6  per  cent  10  days,  5  per 
cent  30  days,  net  4  months.  Subsequently,  however,  com- 
petition became  very  keen.  As  competition  grew,  orders 
were  solicited  earlier  and  earlier  each  year,  until  business 
for  the  fall  season,  which  usually  runs  from  July  until 
January,  was  solicited  as  early  as  April.  This  tendency 
Avas  accentuated  by  the  fact  that  business  during  the  first 
half  of  the  year  is  normally  duller.  As  an  inducement  to 
wholesalers  to  place  orders  early  and  thus  to  put  the  fac- 
tories at  work  on  them,  a  season  dating  of  January  1  was 
introduced,  and  shipments  made  during  May,  June,  and 
early  July.  This  was  followed  by  the  institution  of  a  July 
1  settlement  date  on  goods  for  the  spring  season,  which  is 
stated  by  one  authority  to  have  occurred  as  a  result  of  the 
dull  times  in  the  industry  following  1906.  In  the  mean- 
time, the  season  terms  had  been  applied  also  by  wholesalers 
to  retailers.  Aside  from  the  fact  that  manufacturers  had 
made  a  like  change  in  their  terms  to  wholesalers,  the  forces 
bringing  about  this  change  were  similar  to  those  existing 
in  the  other  ease.  Competition  became  keener,  and  efforts 
were  made  to  induce  earlier  purchasing  and  thus  avoid 
extreme  congestion  at  the  end  of  the  fall  season,  as  it  is 
impossible  for  the  travelers  upon  whom  the  retailers  de- 
pend to  visit  each  of  them  at  the  exact  moment  when  he 
wants  to  buy  his  goods.  In  addition,  there  is  the  fact  that 
the  large  Christmas  business  places  the  retailer  in  funds. 
In  consequence,  the  former  regular  terms  of  6  per  cent  10 
days,  5  per  cent  30  days,  net  4  months,  came  to  be  in  little 
use,  and  have  been  characterized  as  "an  old  formality 
which  has  been  in  discard  for  years,"  terms  being  either 
season  settlement  or  6  per  cent  4  months.  It  is  stated  that 
while  "the  season  settlement  proposition  has  been  in  prac- 
tice for  many  years,"  it  has  "possibly  been  abused  only 
within  the  past  10  to  12  years,  during  which  time  it  was 
pretty  generally  extended  to  all  whose  credit  was  worth 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES   34i 

while."  In  New  England,  however,  wholesalers  never 
adopted  it  very  extensively,  due,  it  has  been  suggested,  to 
the  fact  that  they  cover  a  smaller  territory  and  enjoy  better 
transportation  facilities. 

During  the  war,  however,  the  situation  with  respect  to 
terms  changed.  The  market  began  to  assume  more  the 
appearance  of  a  sellers'  market,  and  manufacturers  short- 
ened terms  and  reduced  discounts,  in  many  cases  to  2  per 
cent  or  3  per  cent  30  days,  net  4  months.  In  consequence, 
in  certain  cases  there  was  a  similar  change  in  wholesalers' 
terms.  In  fact,  wholesalers  at  various  times,  for  example, 
in  1910,  have  discussed  the  question,  but  no  unified  action 
has  been  taken,  the  weaker  wholesalers  having  raised  strong 
objection.  Existing  terms  thus  present  a  rather  confused 
appearance,  many  still  continuing  the  older  season  settle- 
ment terms,  while  others  have  reduced  discounts  and 
shortened  terms  as  indicated  above.  With  the  scarcity  of 
merchandise,  certain  wholesalers  and  retailers  are  reported 
to  have  tended  to  pay  more  promptly  in  the  hope  of  obtain- 
ing preference  in  short-time  deliveries  and  on  short  or  de- 
sirable merchandise.  A  leading  wholesaler,  speaking  of  the 
retailer,  makes  the  following  statement :  * '  Credit  means 
a  great  deal  in  the  jewelry  business,  as  the  biggest  per- 
centage of  the  medium-sized  jewelers  throughout  the 
country-  have  emanated  from  the  workbench,  and  have  built 
up  their  business  on  the  credit  that  the}'-  have  received.  Of 
course,  some  of  these  individuals  have  taken  advantage  of 
this  credit  and  misused  same,  but  the  larger  percentage 
have  built  up  their  stock  and  gradually  are  getting  in  a 
sounder  financial  condition,  and  it  will  be  but  a  short  time 
when  they  voluntarily  will  liquidate  tlieir  debts  in  shorter 
time  than  in  the  past. ' ' 

Data  obtained  by  the  committee  on  terms  and  discounts 
of  the  National  Wholesale  Jewelers'  Association  showed 
that  average  outstandings  of  wholesalers  on  May  1,  1920, 


346   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

■were  equal  to  83  daj^s'  sales."  Of  the  total  volume  of  sales, 
approximately  38  per  cent  were  made  on  30  days'  time,  11 
per  cent  on  60  days,  11  1/2  per  cent  on  90  days,  23  per  cent 
on  4  months,  11  1/2  per  cent  on  semi-annual  terms,  and  5 
per  cent  on  "running  account,"  the  average  of  which,  75 
days,  approximately  agrees  with  the  figure  given  above. 

"While  the  above  are  the  general  terms  which  prevail  on 
jewelry  certain  items  are  sold  on  different  terms,  both  by 
manufacturers  and  by  jobbers.  The  principal  classification 
is  into  standard  and  non-standard  merchandise,  the  latter 
of  which  "needs  to  be  stocked,  arranged,  examined,  and 
discussed  as  to  price  and  quality."  ^^  Terms  on  American 
watches  are  shorter,  such  as  30  or  60  days,  and  discounts 
in  many  cases  smaller,  although  it  is  stated  that  manu- 
facturers generally  price  their  watches  on  a  6  per  cent 
basis,  and  wholesalers  do  likewise.  Due  to  the  relatively 
small  number  of  manufacturers  of  trade-marked  watches, 
it  is  possible  to  take  advantage  more  easily  of  the  existence 
of  a  sellers'  market.  Terms  on  the  item  vary  somewhat, 
6  per  cent  10  days  or  30  days,  net  4  months,  being  fre- 
quently given  but  without  further  dating.  Sterling  silver- 
ware largely  carries  terms  of  2  per  cent  10  days,  net  30 
days.  Diamonds,  the  other  important  non-standard  item 
in  addition  to  jewelry,  have  been  sold  on  longer  time.  This 
is  also  partly  due  to  the  larger  amounts  involved,  in  par- 
ticular where  sold  in  lots  and  not  as  single  diamonds,  and 
by  this  means  the  retailer  is  enabled  to  carry  a  larger  stock 
for  show  purposes.  Moreover,  diamond  importers  have 
granted  very  long  terms,  corresponding  to  the  terms  given 
by  European  sellers.  Cutters'  and  jobbers'  terms  have 
frequently  been  8  to  12  months.     As  a  result  of  scarcity 

"  The  figures  given  in  the  committee 's  report  represent  unweighted 
averages. 

"Eeport  of  Committee  on  Terms  and  Discounts,  National  Whole- 
sale Jewelers'  Association,  Mr.  Sidney  Y.  Ball,  chairman,  presented 
at  the  June,  1920,  convention. 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES   347 

several  years  ago,  however,  both  importer  and  cutter  came 
nearer  a  cash  basis,  although  the  retailer  is  still  used  to 
long  time,  but  is  neither  demanding  nor  receiving  the 
old  extremely  long  terms.  Four  to  6  months'  terms  are 
reported,  and  in  some  cases  cash  discounts,  such  as  3  per 
cent  10  days,  are  quoted  with  these  terms. 

The  situation  is  concretely  shown  in  the  following  table, 
based  on  data  obtained  by  the  committee,  both  as  to  the 
actual  time  received  by  wholesalers  on  their  purchases  and 
granted  by  them  on  their  sales; 


Keceivecl 


Granted 


Diamouds 
Watches 
Jewelry  . 


Clocks   

Silverware    . . 
Miscellaneous 


7  months 

1  mouth 

I  month  to  season 

settlement  (very 

mixed). 

10-30  days  

i  month 

...do 


4.9  months 
2.3  months 
3.5  months 


2.5  months 

2.6  mouths 
2.1  months 


With  respect  to  the, cash  discount,  about  one  half  stated 
that  they  were  "good-natured,"  and  granted  30  to  90  days 
extra,  with  full  discount,  while  the  other  half  were  strict. 

Wholesalers  favored  somewhat  shorter  terms  to  retailers 
than  those  employed,  namely,  about  4  months  on  the  aver- 
age on  diamonds,  2  months  on  watches,  2.8  months  on 
jewelry,  1.9  months  on  clocks  and  silverware,  and  2.1 
months  on  miscellaneous  items.  Preference  w^as  expressed 
for  a  6  per  cent  discount,  both  on  purchases  and  sales,  and 
it  is  also  favored  by  retailers.  It  was  stated  that  these 
terms  would  be  practicable,  in-  view  of  the  fact  that  data 
obtained  from  retailers  by  the  committee  showed  that  67 
per  cent  of  the  latter 's  sales  are  for  cash,  15  per  cent  on 


348   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

30-90  days'  time,  8  per  cent  on  4  months'  time,  and  10  per 
cent  on  running  account.  Two-thirds  of  the  retailers  ex- 
pressed themselves  as  being  able  to  purchase  on  shorter 
terms.  Data  obtained  by  the  committee  as  to  terms  on 
which  retailers  then  purchased  showed  64  per  cent  of  pur- 
chases made  on  30  days'  time,  6  per  cent  on  60  days,  7  per 
cent  on  90  days,  4  per  cent  on  4  months,  3.2  per  cent  on 
semi-annual  terms,  and  7  per  cent  on  running  account. 
The  average  of  these  is  52  days,  as  contrasted  with  75  days 
shown  by  wholesalers  as  their  average  terms  to  retailers, 
and  the  correct  figure  was  stated  to  be  probably  between 
the  two.  Average  time  received  on  diamonds  was  shown 
as  4  months,  on  watches  45  days,  on  jewelry  56  days,  on 
clocks  40  days,  on  silverware  43  days,  and  on  miscellaneous 
items  32  days. 

The  trade  acceptance  is  employed  by  some  leading  whole- 
salers in  the  industry.  Only  one-third  the  retailers  cov- 
ered in  the  survey,  however,  had  used  them,  and  of  these 
one-third  did  not  like  them. 

Optical  Merchandise.^^ — In  the  optical  trade  e.  o.  m. 
terms  prevail. on  nearly  all  accounts,  both  between  manu- 
facturer and  wholesaler  and  wholesaler  and  retailer,  and 
the  10th  is  the  date  specified. 

The  cash  discount  of  the  manufacturer  to  the  wholesaler 
is  2  per  cent  on 'the  10th  of  the  month  following  date  of 
invoice,  at  which  time  the  bill  is  due.  The  prevailing 
wholesaler's  terms  are  6  per  cent  cash  discount  on  the  10th 
of  the  month  following  date  of  bill,  after  which  time  it 
becomes  net,  with  some  houses  immediately  due  and  with 
others  due  on  the  10th  of  the  month  following.  The  matter 
of  net  terms  in  this  connection  is  not  very  clearly  estab- 
lished nor  lived  up  to.    A  leading  authority  estimated,  in 

"  Acknowledgment  is  due  Mr.  Guy  A.  Henry,  Secretary-Manager, 
American  Association  of  Wholesale  Opticians,  for  reading  this 
section. 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES    349 

1919,  that  roughly  two-thirds  of  accounts  of  retailers  with 
wholesalers  were  discounted. 

The  cash  discount  of  6  per  cent  is  "a  relic  .of  the  days 
when  the  optical  business  was  closely  allied  with  the 
jewelry  trade,"  although  the  two  lines  are  now  quite  dis- 
tinct and  separate  and  only  in  rare  instances  affiliated.  It  is 
the  opinion  of  most  wholesalers  that  the  6  per  cent  discount 
for  cash  is  an  unreasonable  premium  for  prompt  payment, 
and  while  a  few  have  expressed  the  opinion  that  a  high 
cash  discount  stimulates  prompt  payment,  the  consensus  of 
opinion  is  that  a  decrease  in  the  discount  should  not  seri- 
ously affect  the  proportion  of  accounts  which  are  dis- 
counted. Many  wholesalers  desire  to  reduce  the  discount 
to  2  per  cent,  making  it  the  same  as  they  receive  .from  the 
manufacturers,  but  a  few  have  opposed  the  change,  and 
this  has  deterred  the  majority. 

A  number  of  wholesalers  have  been  endeavoring  to  in- 
troduce the  2  per  cent  cash  discount  bj'-  applying  this  on 
some  of  their  specialties,  and  practically  all  machinery  and 
instruments  are  now  on  a  2  per  cent  cash  discount  or  ' '  net ' ' 
basis,  while  6  per  cent  is  still  allowed  on  ophthalmic  lenses, 
frames,  mountings,  prescription  work,  etc.  On  the  Pacific 
Coast  the  discount  generally  allowed  and  in  effect  for  some 
time  is  but  2  per  cent  on  all  items. 

Wood  Pulp  and  Paper.-'' — Terms  in  the  industry  vary 
according  to  the  type  of  paper,  but  in  general  are  on  a 
30-day  basis.  It  has  been  stated  that  "when  conditions 
have  been  in  favor  of  the  mills,  discounts  from  2  to  3  per 

"Acknowledgment  is  due  Mr.  Wm.  C.  Ridgway,  Secretary,  The 
National  Paper  Trade  Association,  for  reading  this  section,  and  to 
Mr,  Freas  Brown  Snyder,  President,  W.  C,  Hamilton  and  Sons,  Miq- 
uon.  Pa.;  Mr.  O.  B,  Towne,  Secretary-Treasurer,  Waxed  Paper 
Manufacturers'  Association;  Mr,  E.  S.  Wagner,  Treasurer,  Scott 
Paper  Co.,  Chester,  Pa.;  Mr.  Wm.  W.  Baird,  Secretary,  National 
Paper  Box  Manufacturers'  Association;  and  Mr.  Henry  Burn, 
President,  Wall-Paper  Manufacturers'  Association,  for  reading  parts 
thereof. 


350    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

cent  have  been  in  effect,  and  when  the  market  has  been  a 
jobbers'  market  the  jobbers  have  in  a  great  many  instances 
succeeded  in  eliminating  discounts."  Another  authority 
states  that  "broadly  speaking,  cash  discounts  are  more 
liberal  in  the  fine-paper  line." 

Manufacturers  of  wood  pulp,  in  general,  sell  on  terms 
of  net  30  days,  but  a  few  allow  a  cash  discount,  such  as  1 
per  cent  on  receipt  of  invoice,  or  permit  anticipation  at  the 
rate  of  6  per  cent  per  annum. 

Paper  Manufactures. — Newsprint  paper  is  sold  by 
manufacturers  on  terms  of  net  30  days,  or  settlement  is 
permitted  by  a  specified  date,  such  as  the  15th,  for  all  ship- 
ments made  during  the  preceding  month.  A  greater  pro- 
portion of  newsprint  and  specialties  is  sold  by  manufac- 
turers direct  to  consumers  than  in  the  case  of  other 
products. 

Practically  all  manufacturers  of  writing  paper  sell  their 
product  on  te^ms  of  3  per  cent  30  days  from  date  of  in- 
voice, while  a  few  manufacturers  allow  net  terms  of  4 
months  on  note,  with  the  option  of  3  per  cent  30  days.  A 
leading  wholesaler  also  reports  purchasing  this  class  of 
paper  on  terms  of  2  per  cent  30  days.  Little  use  of  the 
trade  acceptance  is  reported.  Manufacturers  of  writing 
paper  sell  practically  their  entire  output  to  wholesalers 
and  converters,  who  make  up  the  manufactured  finished 
product  into  blank  books,  tablets,  envelopes,  etc. 

The  same  terms  (3  per  cent  30  days)  are  also  employed 
by  manufacturers  of  cover  paper  and  similar  paper  of  the 
higher  grades.  Practically  the  entire  product  is  sold  to 
paper  merchants  or  converters.  Some  manufacturers  of 
fine  or  printing  paper  sell  on  terms  of  2  per  cent  10  days, 
and  many  on  terms  of  net  30  daj^s. 

Manufacturers  usually  sell  book  paper  to  distributors  on 
terms  of  3  per  cent  30  daj^s.  Bills  are  due  net  in  31  days. 
During  recent  years  certain  mills  eliminated  the  cash  dis- 


LUMBER  AND  MISCELLANEOUS  LNDUSTRIES    351 

count  and  went  on  a  net  basis,  but  the  reverse  tendency  is 
now  apparent.  Mills  selling  the  converter  (such  as  the 
manufacturer  of  envelopes)  or  the  lithographer,  tend  to 
quote  a  2  per  cent  discount,  but  this  is  not  universal. 
Terms  of  paper  merchants  to  printers  and  other  consumers 
are  usually  2  per  cent  30  days,  and  they  desire  to  have 
manufacturers  observe  the  same  terms  when  selling  direct. 
A  few  accounts  are  stated  to  receive  additional  time  on  a 
net  basis  and  to  settle  by  note  or  open  account.  A  large 
percentage  of  the  tonnage  is  sold  on  contract  to  pub- 
lishers. 

"Wrapping  paper  is  sold  by  manufacturers  on  terms  of 
2  per  cent  and  3  per  cent  30  days,  although  in  some  cases 
such  coarse  papers  carry  only  2  per  cent  10  days. 

About  60  per  cent  of  the  output  of  waxed  paper  is  sold 
to  the  baking  industry,  and  the  demand  in  the  southern 
and  Rocky  Mountain  sections  is  relatively  light  compared 
with  the  remainder  of  the  country.  Prior  to  May,  1920, 
adopted  terms  of  the  manufacturers'  association  were  2 
per  cent  10  days,  accounts  west  of  Denver  receiving  2  per 
cent  20  days,  but  at  that  time  the  terms  were  abolished. 
Some  manufacturers  now  sell  on  terms  of  2  per  cent  10 
days,  net  30  days,  others  on  net  30  days.  During  the  past 
decade  the  period  was  reduced  successively  from  30  days 
to  15  days  and  to  10  days,  with  an  allowance  of  10  days 
extra  to  extreme  western  territories,  the  discount  remain- 
ing the  same.  Glassine  and  grease-proof  papers  as  a  rule 
are  sold  on  terms  of  2  per  cent  10  days.  Vegetable  parch- 
ment is  sold  on  terms  of  net  30  days.  A  considerable  pro- 
portion of  all  other  kinds  of  paper  is  sold  to  industrial 
consumers. 

Manufacturers  of  towels  and  toilet  paper  in  general  sell 
on  terms  of  2  per  cent  10  days,  net  30  days.  Some  manu- 
facturers, however,  grant  the  cash  discount  for  paj-ment 
■within  15  days,  some  within  30  days,  while  others  quote  3 


352  THE  MECHANISM  OF  COMMERCIAL  CREDIT 

per  cent  30  days  and  others  give  net  terms  of  60  days,  with 
a  cash  discount  of  2  per  cent  10  days.  In  certain  cases 
longer  terms,  such  as  30  days  additional,  are  granted  to 
customers  in  distant  sparsely  settled  territory,  to  which 
carload-lot  shipments  are  necessary  in  order  to  obtain  a 
low  freight  rate,  and  a  slower  turnover  thus  results.  It  is 
stated  that  practically  all  this  type  of  paper  is  sold  to  paper 
merchants  or  converters.  One  authority  estimates  that  60 
per  cent  of  the  product  is  sold  to  wholesale  paper  dealers, 
25  per  cent  to  wholesale  grocers,  and  15  per  cent  to  whole- 
sale druggists  and  miscellaneous  wholesalers.  Trade  ac- 
ceptances, while  by  no  means  general,  are  used  by  certain 
leading  houses,  interest  in  the  majority  of  eases  being 
added  for  the  additional  time  beyond  the  regular  net 
period. 

Wholesale  Paper. — Such  houses,  in  general,  follow  manu- 
facturers '  terms  on  the  several  classes  of  paper.  It  is  stated, 
however,  that  coarse  or  wrapping  papers  are  sold  almost 
universally  by  paper  merchants  on  terms  of  2  per  cent 
10  days,  net  30  days,  10  days  e.  o.  m.  terms  being  granted 
on  running  accounts.  Among  fine  or  printing  papers, 
newsprint  is  sold  quite  generally  on  net  30  days.  Some 
book  papers  are  also  sold  on  these  terms,  but  these  kinds 
of  paper,  in  general,  carry  terms  of  2  per  cent  30  days. 
In  New  England,  New  York  City,  Baltimore,  and  the  South, 
3  per  cent  30  days,  however,  formerly  prevailed,  and  in 
the  South  net  terms  were  60  days.  In  consequence  of  a 
similar  tendency  on  the  part  of  manufacturers,  there  has 
been  a  decided  tendency  on  the  part  of  paper  merchants 
to  shorten  terms  during  the  past  decade  and  to  reduce  the 
discounts.  In  case  of  fine  papers,  up  to  the  opening  of 
1919  the  discount  was  almost  universally  3  per  cent,  while 
6  to  7  years  ago  net  terms  were  90  days,  which  has  been 
gradually  shortened  until  to-day  most  goods  carry  net 
terms  of  30  days  and  but  few  longer  than  60  days.    Trade 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES    353 

acceptances  are  not  very  largely  employed  by  paper  mer- 
chants. 

Paper  Board,  Paper  Boxes,  etc. — In  the  spring  of  1920, 
manufacturers  of  box  board  and  paper  board  successfully 
changed  their  terms  to  1  per  cent  10  days,  net  30  days. 
Prior  to  that  time  terms  were  generally  2  per  cent  15  days, 
net  30  days.  In  the  West,  practically  the  total  output  is 
sold  direct  to  the  converter  or  consumer.  The  couA'erter 
manufactures  the  raw  material,  paper  board,  into  various 
types  of  paper  boxes,  and  furnishes  these  to  the  user,  who 
packs  merchandise  in  them.  The  jobber  or  middle-man 
has  practically  no  place  in  the  business  west  of  the  Alle- 
ghenies.  In  the  East,  however,  with  about  the  same  ton- 
nage and  value,  it  has  been  estimated  that  he  sells  probably 
20  per  cent  of  the  total,  the  balance  being  sold  direct  by 
the  mills  to  the  consumer  or  converter.  Manufacturers  sell 
binder's  board  on  terms  of  2  per  cent  15  days,  net  30  days. 
Cardboard  also  bears  a  2  per  cent  cash  discount. 

Terms  recommended,  in  1919,  by  the  National  Paper  Box 
Association  were  2  per  cent  10  days,  net  30  days,  with  inter- 
est at  the  rate  of  6  per  cent  per  annum  on  overdue  accounts. 
Present  terms  are  net  30  days,  with  no  cash  discount. 
Extremely  limited  use  is  made  of  the  trade  acceptance. 
Practically  the  entire  output  of  paper-box  plants  is  sold  to 
industrial  consumers.  Adopted  terms  of  the  Folding  Bos 
Manufacturers'  National  Association  are  1  per  cent  10 
days,  net  30  days.  Prior  to  1917,  practice  with  respect 
to  terms  was  extremely  loose.  Manufacturers,  it  is  stated, 
would  often  make  practically  a  year's  supply  of  goods, 
warehousing  them  without  adequate  charge,  and  would 
ship  as  required  by  the  customer  on  terms  of  2  per  cent  10 
days,  net  30  days.  Not  over  5  to  10  per  cent  of  the  output 
is  sold  to  dealers  for  resale,  such  items  being  suit  and 
laundry  boxes,  ice-cream  pails,  egg  containers,  etc.  During 
1920   terms   on    corrugated   and    solid   fiber   boxes   were 


354   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

changed  to  net  10  days,  and  collections  are  generally  made 
within  15  days.  Prior  to  6  or  7  years  ago  terms  were  gen- 
erally 2  per  cent  10  days,  net  30  days,  and  at  that  time 
the  discount  was  changed  to  1  per  cent.  The  trade  accept- 
ance is  not  used  to  any  great  extent.  Practically  the  entire 
output  is  sold  direct  to  industrial  consumers. 

Wall  Paper. — The  manufacturers'  association  in  this  in- 
dustiy  adopted  the  following  terms  of  sale  on  July  17, 
1920:  "Three  months  from  date  of  invoice,  provided 
settlement  is  made  by  trade  acceptance  within  10  days  from 
the  first  of  the  month  next  following  date  of  shipment. 
For  cash  payment  within  the  time  specified  in  lieu  of  trade 
acceptance,  1  per  cent  discount  per  month  will  be  allowed 
from  the  date  of  such  payment  to  the  date  trade  accept- 
ance would  have  matured.  All  invoices  become  due  on  the 
10th  of  the  month  next  following  date  of  shipment  if  not 
settled  previously  by  trade  acceptance  or  cash.  Interest 
will  be  charged  on  all  overdue  accounts.  Delays  in  trans- 
portation do  not  alter  these  terms  of  sale.  With  the  fore- 
going understanding  as  to  settlement,  invoices  rendered 
between  September  15  and  February  1  will  carry  the  latter 
date,  except  in  the  case  of  invoices  covering  goods  shipped 
on  duplicate  orders  for  fall  and  winter  requirements  of 
goods  of  previous  year's  manufacture,  which  class  of  ship- 
ments carry  no  advance  dating."  In  other  words,  by  the 
10th  of  the  month  following  that  in  which  shipment  was 
made,  the  purchaser  must  decide  to  settle  either  by  cash 
or  by  trade  acceptance.  If  he  settles  by  trade  acceptance, 
he  is  allowed  90  days  from  date  of  invoice.  If  the  ship- 
ment was  made  between  September  15  and  February  1  the 
latter  is  taken  as  the  invoice  date,  the  net  due  date  being 
May  1.  For  cash  payment  discount  is  allowed  at  the  rate 
of  1  per  cent  per  month.  This  makes  the  figure,  in  the  case 
of  shipments  made  between  February  1  and  September  15, 
which  carry  no  dating,  either  3  per  cent  for  payment  when 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES    355 

shipped,  or  2  per  cent  10  days  e.  o.  m.  In  the  case  of  ship- 
ments carrying  the  dating,  the  discount  will  naturally  be 
much  greater  if  payment  be  made  shortly  after  time  of 
shipment.  Thus  the  schedule  of  one  manufacturer  quotes 
7  1/2  per  cent  for  payment  before  September  25,  with  a 
decline  of  1/2  per  cent  every  15  days  until  3  per  cent  is 
given  for  payments  between  January  25  and  February  10, 
and  the  bill  is  due  net  if  paid  between  April  25  and  May  10. 

Since  April  12,  1919,  the  same  terms  were  in  effect,  with 
the  exception  that  30  days  was  provided  in  place  of  the 
10  days  e.  o.  m.,  and  note  settlement  in  lieu  of  trade  accept- 
ance was  permitted.  Prior  to  that  time  the  dating  was 
March  1  instead  of  February  1,  while  prior  to  about  3  years 
ago  the  terms  were  4  months  instead  of  3.  The  object  of 
the  February  1  dating  is  to  induce  dealers  to  accept,  goods 
as  manufactured,  and  before  they  are  actually  required. 
Manufacturers  can  thus  deliver  as  goods  are  ready,  obvi- 
ating the  necessity  of  extensive  warehouse  space.  Manu- 
facture is  commenced  about  September  1,  and  the  manu- 
facturer has  but  one  season,  while  the  retailer  has  two — 
spring  and  fall. 

The  above  are  the  terms  on  regular  goods.  Plain  goods 
are  not  subject  to  the  February  1  dating,  while  30-inch 
goods,  plain,  are  sold  on  a  30-day  basis,  as  are  also  stock 
goods  (carried  over  from  the  year  previous  and  not  manu- 
factured again). 

Drugs  and  Medicines.^^ — Manufacture  and  Import. — 
The  drug  business  as  a  whole  may  be  generally  divided 
into  four  classes :  (1)  Drugs  and  chemicals ;  (2)  proprietary 
articles;  (3)  druggists'  sundries,  and  (4)  druggists'  and 
hospital  supplies  and  utensils.  The  first  class  may  be  sub- 
divided into  the  following  groups:     (1)    Pharmaceutical, 

"  Acknowledgment  is  due  Mr.  W.  J.  Woodruff,  Secretary,  Ameri- 
can Drug  Manufacturers  Association,  and  Mr.  C.  H.  Waterbury,  Sec- 
retary, National  Wholesale  Druggists  Association,  Inc.,  for  reading 
this  section. 


356   THE  MECHANISM  OF  COMMERCIAL  CREDIT 

including  pills,  tablets,  fluid  extracts,  etc.;  (2)  biological, 
including  vaccines,  bacterins,  anti-toxines,  etc.;  (3)  medic- 
inal and  technical  chemicals;  and  (4)  crude  drugs  and 
essential  oils.  Perfumes,  rubber  goods,  soaps,  soda  foun- 
tain supplies,  cosmetics,  etc.,  are  included  in  the  general 
classification  of  sundries.  Surgical  dressings,  plasters, 
bottles,  scales,  etc.,  properly  belong  to  the  classification 
of  druggists'  and  hospital  supplies  and  utensils.  Proprie- 
tary articles  include,  generally  speaking,  all  so-called 
patent  medicines  advertised  and  sold  under  trade-marks. 
The  method  of  distributing  the  greater  proportion  of  all 
these  classes  of  goods  is  from  the  first  hands,  either  manu- 
facturer or  importer,  to  the  wholesale  druggist,  who  in  turn 
sells  them  to  the  retail  druggist. 

Crude  drugs  and  essential  oils  are  assembled  in  the  main 
by  houses  which  import  them  as  well  as  distribute  domestic 
goods  of  this  character.  Terms  on  crude  drugs,  medicinal 
and  technical  chemicals  and  essential  oils  are  almost  with- 
out exception  1  per  cent  10  days,  net  30  days. 

The  same  terms  apply  generally  in  the  surgical  dressing 
field,  although  the  maturity  date  is  frequently  extended 
to  60  days  on  shipments  to  the  far  southwest  and  to  the 
Pacific  Coast  and  Rocky  Mountain  territory. 

The  pharmaceutical  branch,  including  pharmaceutical 
specialties  (semi-proprietary  and  non-competitive  in  char- 
acter), aggregates  not  more  than  from  15  to  20  per  cent 
of  the  total  volume  of  the  drug  business  to-day.  The  larger 
proportion,  probably  85  per  cent,  of  pharmaceutical  spe- 
cialties, is  sold  to  the  retail  druggist  through  the  wholesaler, 
while  about  25  per  cent  of  the  general  pharmaceutical  line 
goes  through  the  wholesaler,  the  balance  going  direct  from 
the  manufacturer  to  the  retailer.  The  following  are  the 
results  of  a  survey  of  terms  made  in  1917 : 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES   357 


Net  terms  to 

Whole- 

Re- 

Discounts 

saler 

tailer 

30  days  . . . 

17 

12 

1  per  cent  10  days  (by  all  30-day 
houses  except  two,  which  gave  2 
per  cent  10  days). 

60  days  . . . 

4 

7 

2  per  cent  10  days  (by  all  60-day 
houses). 

10  days  . . . 

1 

4  months. . 

1 

•• 

Private  formula  business  (the  manufacture  of  special- 
ties under  formulas  owned  by  others)  carried  instead  1 
per  cent  10  days,  net  30  days,  except  for  2  houses  giving 
net  terms  of  60  days.  As  a  small  number  of  the  larger 
houses,  however,  extend  terms  of  2  per  cent  10  days,  net 
60  days,  some  of  the  firms  having  30-day  terms  occasionally 
extend  60  days  when  insisted  upon.  It  is  estimated,  how- 
ever, that  90  per  cent  of  the  number  of  wholesalers  discount 
their  bills,  and  in  the  case  of  retailers  from  40  to  50  per 
cent.  One  authority  states  that  the  percentage  of  retailers 
discounting  varies  with  the  season  of  the  year,  the  per- 
centage for  his  house  during  the  first  6  months  averaging 
a  little  over  40  per  cent,  falling  to  almost  25  per  cent  during 
the  summer  months,  and  then  increasing  during  the  latter 
part  of  the  year  to  almost  50  per  cent.  Due  to  the  fre- 
quency and  small  size  of  purchases,  the  trade  acceptance 
is  not  employed  by  the  majority  of  manufacturers. 

Sales  of  proprietary  medicines  are  made  by  manufac- 
turers to  wholesalers  and  to  retailers,  the  individual 
manufacturer  usually  confining  his  entire  business  to  one 
of  the  two  methods.  Sales  to  wholesalers  in  general  carry 
a  cash  discount  of  2  per  cent  10  days,  although  a  limited 
number  grant  1  per  cent,  some  3  per  cent,  and  quite  a 


368    THE  MECSANISM  OF  COJ^OiESCIAL  CREDIT 

number  5  per  cent.  Sales  to  retailers  carry  the  same  net 
terms  as  those  to  wholesalers,  maturity  usually  being  in 
30,  60  and  90  days,  with  a  discount  for  cash  varying  from 

1  to  5  per  cent  if  invoice  is  paid  within  10,  20,  or  30  days. 
In  the  case  of  seasonal  preparations,  longer  time  to  the 
retailer  is  required  in  off  seasons,  and  up  to  4,  6,  and  9 
months  may  be  given  at  times.  The  general  average  for 
the  industry  has  been  estimated  at  45  days. 

Sales  of  druggists'  sundries  are  made  by  manufacturers 
to  both  wholesalers  and  retailers.  Terms  for  some  years 
have  been  largely  2  per  cent  10  days,  net  30  days,  from 
date  of  invoice,  but  Pacific  Coast  customers  may  be  given 

2  per  cent  30  days,  net  60  days.  Several  leading  manufac- 
turers report  that  from  50  to  70  per  cent  of  their  customers 
discount  their  bills.  It  is  stated  that  the  trade  acceptance 
is  not  employed  in  the  industry. 

Wholesale  Drugs. — Since  January  1,  1905,  recommended 
terms  of  the  National  Wholesale  Druggists  Association,  to 
apply  to  mixed  invoices,  have  been  1  per  cent  10  days,  net 
30  days.  These  terms  prevail  practically  over  the  entire 
country,  with  the  exception  of  the  entire  State  of  Texas 
and  a  narrow  belt  running  east  from  Texas  to  the  Atlantic 
Coast  and  including  parts  of  Arkansas,  Tennessee,  Ala- 
bama, and  Georgia,  where,  with  a  few  exceptions,  the  cash 
discount  is  2  per  cent,  although  net  terms  are  30  days.  It 
is  stated,  however,  that  in  these  territories  the  discount  is 
gradually  being  changed  to  a  universal  1  per  cent.  An 
increasing  tendency  toward  proximo  terms  was  reported 
some  years  ago  and  found  in  particular  in  the  East  and 
Southwest.  In  1915  data  obtained  from  135  houses  of 
dates  for  the  discounting  of  city  bills  showed  88  houses 
which  specified  the  10th,  26  the  15th,  6  the  5th,  and  1  the 
20th,  while  2  required  settlement  any  time  during  the  fol- 
lowing month,  10  twice  a  month  and  2  four  times  a  month. 

In  a  few  lines,  when  sales  are  large  enough  to  be  billed 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES  359 

Beparately,  2  per  cent  10  days,  net  30  days,  is  allowed.  On 
druggists'  sundries  the  cash  discount  now  ranges  from 
1  per  cent  to  2  per  cent.  There  has  been  a  movement  in 
various  sections  to  include  the  item  in  the  general  terms 
of  1  per  cent  10  days,  net  30  days,  which  is  meeting  with 
some  success.  New  England  and  the  Middle  States  in  1914 
already  showed  quite  uniformly  1  per  cent  10  days,  net 
30  days,  while  on  the  Pacific  Coast  all  houses  have  for  the 
last  five  or  six  years  employed  these  terms. 

The  decrease  in  the  average  number  of  days'  business 
outstanding  shown  below  reflects  the  movement  for  the 
abolition  of  separate  billing  of  different  classes  of  items. 

In  connection  with  druggists'  sundries,  difficulty  is  ex- 
perienced with  competition  from  jobbers  of  stationery  and 
school  supplies  who  also  carry  this  item.  The  situation 
in  this  regard  appears  substantially  as  follows:  The  re- 
tailer has  expanded  his  business  to  include  side  lines 
handled  by  other  retailers  also,  and  a  similar  change  is 
noted  in  the  wholesaler's  business.  The  latter,  however, 
in  this  development  comes  to  handle  certain  lines  which 
are  distributed  only  to  a  small  extent  through  the  drug 
trade,  and  thus  reaches  out  to  sell  these  items  to  exclusive 
retailers  as  well  as  to  retailers  of  drugs.  In  consequence, 
a  measure  of  diversity  is  introduced  into  the  terms  on 
which  merchandise  is  purchased  by  the  wholesale  druggist, 
which  is  reflected  as  well  in  the  terms  on  which  he  sells. 
He  therefore  has  undertaken,  as  in  the  case  of  stationery,  to 
induce  the  members  of  the  other  industries  to  employ  the 
regular  drug  terms  of  1  per  cent  10  days,  net  30  days. 
In  pursuance  of  this  policy,  a  committee  was  appointed  in 
1915,  and  reported  in  1916  that  since  January  1  of  that 
year  many  leading  stationery  houses  had  reduced  their 
cash  discount  from  5  or  6  per  cent  to  2  per  cent.  Terms 
favored  were  1  per  cent  10  days,  net  30  days,  on  the  item, 
with  the  exception  that  where  competition  from  wholesale 


360    THE  MECHANISM  OF  COMMERCIAL  CREDIT 

grocers,  book,  stationery  and  scliool-supply  houses  did  not 
permit,  2  per  cent  might  be  granted.  In  1917,  employment 
of  the  regular  terms  was  recommended  on  sundries  ordered 
in  the  regular  course  of  business,  leaving  it  to  the  discretion 
of  those  who  employed  special  salesmen  to  make  the  cash 
discount  2  per  cent  instead. 

As  the  retail  drug  trade  is  over-crowded,  and  there  is 
a  lack  of  financial  responsibility  on  the  part  of  its  members, 
the  enforcement  of  terms  by  wholesalers  is  rendered  more 
difficult.  It  has  been  stated  that  44.5  per  cent  of  the  50,000 
retail  druggists  in  the  country  have  either  no  capital  rating 
or  one  of  not  over  $2,000,  23.5  per  cent  a  rating  of  from 
$2,000  to  $5,000,  and  14  per  cent  a  rating  of  from  $5,000 
to  $10,000.  Ninety-two  per  cent  of  those  in  the  first-men- 
tioned class  have  a  second  or  third  grade  credit  rating  or 
no  capital  and  credit  rating  at  all,  while  2/3  of  those  in  the 
second  class  have  a  second  or  third  grade  credit  rating. 
In  1919,  it  was  estimated  that,  of  annual  sales  of  $420,- 
000,000,  wholesalers  carried  past  due  accounts  of  about 
$20,000,000.  The  practice  of  charging  interest  on  past  due 
balances,  or  the  use  of  interest-bearing  notes,  has  been 
consistently  advocated.  Interesting  in  this  connection  also 
are  the  following  figures  showing  percentage  loss  by  bad 
debts. 


States 

New  England  and  Middle  States 

Middle  Western  States 

Southern  States 

Pacific  Coast  States 

General  average 


1909 

1914 

0.37 

0.33 

.314 

.35 

.56 

.713 

.38 

.382 

.40 

.442 

1919 


0.172 
.219 
.248 
.16 
.2 


While  all  sections  showed  a  considerable  decrease,  that 
for  the  South  was  particularly  pronounced.  As  would  be 
expected,  the  percentage  of  cash  discounters  has  been  in 


LUMBER  AND  MISCELLANEOUS  INDUSTRIES   361 


the  past  relatively  small,  the  average,  in  1916,  being  re- 
ported as  approximately  20  per  cent,  but  there  has  been  a 
substantial  increase  since  that  time.  An  indication  of  the 
change  in  the  actual  length  of  terms  employed  is  afforded 
by  the  following  figures  of  number  of  days'  sales  out- 
standing : 


States 

New  England  and  Middle  States 

Middle  Western  States 

Southern  States 

Pacific  Coast 

General  average. 


1909 

1914 

55 

53.7 

43 

48.0 

67 

68.0 

52 

56.0 

54 

55.2 

1919 


39.3 
37.8 
42.6 
40.5 
40.0 


The  greatest  decrease  is  again  evident  in  the  case  of  the 
Southern  States. 

In  view  of  the  interest  expressed  by  a  few  members,  the 
National  Wholesale  Druggists  Association  appointed  a 
special  committee  which  carefully  considered  the  trade  ac- 
ceptance. A  referendum  vote  was  later  held  which,  how- 
ever, "clearly  demonstrated  that  the  trade  in  general  does 
not  look  with  favor  upon  the  use  of  the  trade  acceptance  in 
the  industry. ' ' 


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1.  Leather 
(shoe  soles) 
(12)  (14) 
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(31)  (33) 

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(wrapping) 
(who.) 
(12a)  (26) 

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(women's) 
(24)  (51) 

3.  Underwear 
(light  weight) 
(who.) 

(4a)  (5)  (6) 
(15)  (16)  ' 
(48)  (51) 

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1.  Coffee 
(green) 
(2)  (14) 

2.  Hosiery 

3.  Silk 
(thrown) 

4.  Underwear 
(general) 
(4a)  (5)  (6) 
(15)  (18) 
(48)  (51) 

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1.  Blankets 
(retail) 

2.  Hosiery 
(heavy 

woolen) 
(3)  (12)  (13) 
(16)  (33) 
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(general) 
(used      exten- 
sively) 

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(general) 
(13)  (24) 

5.  Shirts 
(work) 
(3)  (11) 

6.  Suspenders 
(jobbers) 

7.  Underwear 
(cloth) 

(to  wholesalers 
&  retailers) 
(4a)  (5)  (6) 
(16)  (18) 
(48)  (61) 

8.  White  goods 
(14a) 

O 
fl 

15.  Machine 
Tools 

16.  Meats 
(smoked) 
(cured) 
(2) 

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appliances 
(12) 

18.  Paints 
(mixed) 
(4a)  (12a) 

19.  Shirtings 

20.  Silk 

21.  Shoes 

(to  retailers) 
(3)  (12a) 
(24)  (33) 

22.  Spices 

23.  Stationery 

24.  Tobacco 
(smoking) 
(twist) 
(plug) 

26.  Tubes 
(welded) 
(12a) 

26.  Upholstery 
(auto) 

27.  Varnishes 

&  mixed  paints 

28.  White  goods 
(16) 

29.  Wire  goods 
80.  Vam 

364 


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INDEX* 


Acceptance  Bulletin,  128,  135. 

Agger,  E.  E.,  118,  IGl,  181. 

Agricultural  implements,  33,  55, 
59,  60,  151,  242. 

Agricultural  produce,  39,  46, 
47,  48,  102. 

Alexander  Hamilton  Institute, 
Modern  Business  Series, 
12. 

Allied  Council  of  the  American 
Shoe  and  Leather  Indus- 
tries and  Trades,  327. 

American  Acceptance  Council, 
114,  115,  126,  127,  128, 
135. 

American  Bankers  Association, 
122,  123,  124,  125. 

American  Bankers  Association, 
Journal,  126,  132,  140. 

American  Business  and  Na- 
tional Acceptance  Journal, 
128. 

American  Hardware  Manufac- 
turers Association,  130, 
215,  217. 

American  Institute  of  Banking, 
126. 

American  Lumber  Congress, 
11,  332. 

American  Trade  Acceptance 
Council,  114,  115,  122,  123, 
124,    125,    126,    127,    132, 


Anticipation  rates,  86. 

Auto  tires.   See  Rubber  goods. 

Automatic  elasticity  of  paper, 

177. 
Automobile  accessories,  51,  240. 
Automobiles,  20,   54,  233. 

Ball,  S.  Y.,  20,  21,  23,  42,  346. 

Bankers  and  the  trade  accep- 
tance, 124. 

Banking,  8,  9,  30,  74. 

Banking  Law  Journal  Year 
Book,  12. 

Bean,  R.  H.,  127,  128,  140. 

Blankets,  284. 

Bonham,  W..M.,  43,  171,  177. 

Boots  and  shoes,  58,  106,  325. 

Bureau  of  Foreign  and  Domes- 
tic Commerce,  Miscellane- 
ous Series,  13,  286,  306, 
342. 

Business  Bourse,  141,  143. 

Business  character  and  terms, 
47. 

Business  cycle,  89. 

Business  practice,  173. 

Buyer  vs.  seller,  39,  45. 

Calkins,  J.  U.,  120. 

Canned  goods,  20,  53,  63,  64, 

102,  190. 
Canners'  League  of  California, 

192. 


133,  141,  143. 

^Eeferencea  in  index  set  in  bold-face  type  refer  to  section  on  the 
subject  indexed. 

369 


370 


INDEX 


Cannon,  J.  G.,  125. 

Capital  position   of  seller,  43, 

80. 
Carpets  and  rugs.     See  Floor 

coverings. 
Cash  Discount,  Chapter  V. 
function,  73. 
methods  of  quoting,  76. 
nature,  71. 
relation  to  temis,  72. 
size,  78. 
Cash  discount  and  selling  price, 

180. 
Cash  discount  period,  75. 
Cash  discount  system,  144,  154, 

159. 
Cash  outlay,  42. 
Cement,  76. 
Chamber  of  Commerce  of  the 

United    States,    122,    132, 

133. 
Chering-ton,  P.  T.,  13,  268,  304. 
Chicago  Board  of  Trade,  47. 
City  vs.  country  trade,  23. 
Classes  of  goods,  17,  19,  22,  62. 
Cleveland    Chamber    of    Com- 
merce, 128. 
Closing  a  transaction  at  once, 

174. 
Coal  and  coke,  26,  41,  46,  62, 

77,  81,  92,  257. 
Coffee,  40,  73,  77,  197. 
Collection  of  accounts,  169. 
Commercial    credit    system,    5, 

Chapters  IX,  X. 
Commissioner  of  Corporations, 

242. 
Competitive  conditions,  38,  79. 
Competitive  discounts,  83. 
Composition    of    the    business 

community,  175. 
Confectionery,  20,  68,  198. 


Consignment  business,  32. 
Copper,  46,  54,  80,  210. 
Cotton,  25,  269. 
Credit  measurement. 

agency  for,  158. 

in  different  types  of  indus- 
tries, 164. 

method  of,  166. 

seller  vs.  bank,  160. 
Credit  Men's  Diary,  362. 
Credit  Monthhj,  12,  121. 
Curtiss,  F.  H.,  119. 
Customary  settlement  dates,  24. 

Datings,  Chapter  IV. 

competitive,  65. 

extra,  65. 

indirect,  63. 

season,  36,  56. 
Department  store  discounts,  84. 
Discount  market,  181. 
Discounts  and  business  condi- 
tions, 92. 
Dodd,  C.  H.,  13,  335. 
Drafts,  use  of,  53. 
Drugs   and   medicines,   51,   52, 

98,  355. 
Dry  goods  (wholesale),  56,  57, 
60,  63,  64,  65,  95,  105,  290. 
Dupuis,  C.  W.,  124. 

E.  0.  M.  terms,  68. 
Economic  process,  6,  7. 
Electrical  products,  150,  254. 
Ettinger,  R.  P.  &  Golieb,  D.  E., 
64. 

Farm  lands,  24. 

Federal  Reserve  Act,  115,  116, 

117,  120,  136. 
Federal    Reserve   Agents,   140, 

141. 


INDEX 


371 


Federal  Reserve  Bank,  117, 118, 

119,  120,  136,  137,  138. 
Federal    Resen'e    Board,    116, 

117,    118,    119,    123,    134, 

136,  141,  142,  143. 
Federal   Reserve    Bulletin,    14, 

129. 
Federal  Trade  Commission,  13, 

46,  120,  191,  242,  243,  258, 

262,  321. 
Fernley,  T.  A.,  95,  97. 
Finance, 

fundamental  tests,  157. 
system  of,  153. 
Fixed  capital  goods,  26,  27, 
Floor  coverings,  51,  65,  284. 
Flour,  25,  53,  77,  150,  192. 
Folding     Box     Manufacturers' 

National  Association,  353. 
Foodstuffs,  22,  67. 
Forgan,  J.  B.,  125. 
Frequency  of  purchases,  62. 
Furs,  314. 

General  business  conditions,  89, 
94. 

General  prices,  179. 

Geogi-aphy  of  terms,  24, 52,59, 64. 

Glass  and  glassware,  341. 

Gloves,  36. 

Graded  discounts,  84. 

Groceries  (wholesale),  10,  23, 
25,  41,  42,  52,  68,  75,  76, 
77,  82,  95,  98,  99,  100,  101, 

102,  104,  105, 106,  107,  108, 
150,  200. 

Grouping  of  transactions,  07. 

Harding,  W.  P.  G.,  134. 
Hardware,  24,  27,  41,  43,  51, 
63,  64,  80,  82,  97,  98,  99, 

103,  104,    105,    107,    108, 
109,  165,  170,  171,  215. 


Harris,  B.  D.,  125. 

Harvard  University,  Bureau  of 

Business     Research,     196, 

205. 
Hayes,  E.  B.,  133. 
Hides,  49. 
High  discounts,  83. 
Hirsch,  J.,  133. 
Holdsworth,  J.  T.,  124,  133. 
Hooker,  K.  T.,  133. 
Hosiery,  42,  285. 

Installments,   26,    27. 
International     Harvester     Co., 

245. 
Iron  and  steel,  10,  40,  80,  98, 

209. 

Jay,  P.,  119. 

Jenks,  J.  S.,  Jr.,  132,  133,  141, 

144. 
Jenks,  J.  W.,  and  Clark,  W.  E., 

40. 
Jenks  bill,  132,  169. 
Jewelry,  20,  21,  23,  42,  54,  105, 

151,  164,  343. 
Johnston,  P.  H.,  127. 

Kent,  F.  I.,  127. 
Kingsbury,  I.  D.,  84,  307. 
KniflSn,  W.  H.,  12. 

Lace  and  Embroidery  Associa- 
tion, 289. 

Laces  and  embroideries,  288. 

Large  markets  and  terms, 
41. 

Lead,  42,  54,  79,  98,  210. 

Leather,  37,  49,  5],  00,  05,  319. 

Letts,  F.  C,  100. 

Lichty,  G.  E.,  108. 

Line  of  credit  system,  166. 


372 


INDEX 


Low  discounts,  82. 
Lumber,  41,  54,  75,  102,  103, 
151,  332. 

Machine  tools  ("machinery"), 
26,  28,  43,  80,  103,  224. 

Machinery,  26,  27,  28,  29,  55, 
81,  227. 

Marketing  period,  18,   30,   57, 

66,  78. 
Marketing  system,  30,  60. 
Mathewson,  P.,  141,  148. 
Meats,  20,  22,  23,  37,  61,  68, 

98,  188. 

Men's  clothing,  59,  65,  82,  84, 
304. 

Men's  hats,  10,  22,  25,  26,  61, 
62. 

Merchants'  Association  of  New 
York,  118. 

Mill  supplies,  43,  80,  224. 

Millinery,  63,  67,  81,  316. 

Millinery  Chamber  of  Com- 
merce of  the  United  States, 

67,  317. 

Millinery  Jobbers'  Association, 

317,  318,  319. 
Minnesota    Wholesale   Grocers' 

Association,  52. 
Mitchell,  W.  C,  89. 
Montana     Wholesale     Grocers' 

Association,  52. 
Moulton,  H.  G.,  179. 
Mutual  interrelation  of  terms, 

50. 

National  Association  of  Cloth- 
iers, 84. 

National  Association  of  Credit 
Men,  13,  114,  120,  121, 
122,  123,  127,  136,  141, 
143,  156,  252. 


National  Association  of  Credit 
Men,  Bulletin,  12,  121, 133. 

National  Association  of  Hard- 
ware Retailers,  103. 

National  Association  of  Hos- 
iery and  Underwear  Manu- 
facturers, 286. 

National  Association  of  Manu- 
facturers, 123,  141. 

National  Canners'  Association, 
190. 

National  Coffee  Roasters'  Asso- 
ciation, 131. 

National  Hardware  Associa- 
tion, 99,  105, 130, 150,  216, 
219,  221. 

National  Implement  and  Ve- 
hicle Association,  59,  244, 
247,  251. 

National  Millinery  Association, 
317,  318. 

National  Paper  Box  Associa- 
tion, 353. 

National  Trade  Acceptance 
Bureau,  Inc.,  128. 

National  Wholesale  Druggists' 
Association,  358,  361. 

National  Wholesale  Dry  Goods 
Association,  64,  71,  95, 
105,  292,  294. 

National  Wholesale  Grocers' 
Association,  104,  105,  106, 
107,  141,  190,  200,  201, 
203. 

National  Wholesale  Jewelers' 
Association,  20,  105,  345, 
346. 

National  Wliolesale  Lumber 
Dealers'  Association,  54, 
71,  75,  102,  336,  338. 

Nature  of  the  article,  19,  62. 

Necessities  vs,  luxuries,  22. 


INDEX 


373 


Net  period,  how  covered,  53. 

Net  temis,  81. 

Net  terms  system,  154,  159. 

New  York  City  Ganuent  Con- 
ference Comacil  of  Whole- 
salers and  Retailers,  53, 
70,  312. 

New  York  Clearing  House  As- 
sociation, 118. 

New  York  Lumber  Trade  As- 
sociation, 337. 

Nones,  W.  M.,  133. 

North  Dakota  Wholesale  Gro- 
cers' Association,  52. 

Notes,  use  of,  29,  54. 

Office  furniture,  338. 

One-season  industries,  60. 

Onthank,  A.  H.,  13,  320. 

Open  account,  53. 

Open  market  terms,  46. 

Optical  merchandise,  50,  51, 
348. 

Orr,  W.  W.,  123,  125,  134. 

Outstandings  of  wholesale  gro- 
cers, 100. 

Paine,  G.  H.,  132,  141,  144. 
Paint  and  varnish,  50,  57,  58, 

340. 
Paint  and  Varnish  Credit  Club, 

57. 
Paper.      See  Wood   pulp   and 

paper. 
Past-due  rates,  86. 
Pay-day  terms,  23. 
Perishability  of  articles,  20,  62. 
Petroleum,  36,  102,  262. 
Pierson,  L.  E.,  123,  125,  127, 

131,  133. 
Prendergast,  W.  A.,  56,  65. 
Price  differentials,  76. 


Prices  of  particular  goods,  179. 
Profits  margin,  43,  81,  108. 
Proximo  terms,  68. 

Railway  equipment,  28,  42,  43, 

81,  229. 
Ramsey,  W.  F.,  119. 
Rate  of  consumption,  19. 
Raw  materials,  25. 
Raw  Ostrich  Feather  Importers' 

Association,  319. 
Recommended  terms,  102. 
Relation    of    the    borrower    to 

the  bank,  176. 
Retail  trade,  29. 
Reynolds,  A.,  127. 
Rindsfoos,  C.  S.,  12. 
Robert  Morris  Associates,  13. 
Rubber  goods,  22,  32,  55,   61, 

68,  82,  240. 

Sands,  0.  J.,  114. 

Scales,  J.  H.,  133. 

Seasonal  vs.  cun'ent  use,  22,  35, 
36. 

Shipments  to  distant  terri- 
tories, 64. 

Ships,  27,  29,  81,  230. 

Shortening  of  terms,  94,  98. 

Silk,  25,  85,  86,  102,  274. 

Silk  Association  of  America, 
85,  275,  277,  278. 

Simmons,  W.  D.,  131,  133. 

Size  of  article,  20. 

Southern  Wagon  Manuf ac- 
tui'ers'  Association,  248. 

Southern  Wliolesale  Dry  Goods 
A.ssociation,  105,  150,  292, 
293,  294. 

Spariing,  W.  L.,  128. 

Spices,  40,  197. 

Sporting  goods,  224. 


374 


INDEX 


Spragiie,  0.  M.  W.,  118. 
Standardization      of      articles, 

21. 
Standardization   of   terms,   41, 

101. 
State    Council    of    Defense    of 

Washington,  95. 
Stationery,  52. 
Steiner,  W.  H.,  30;  168. 
Stix,  S.  L.,  131,  133. 
Store  fixtures,  339. 
Sugar,  33,  40,  77,  106,  196. 
Sullivan,  J.  J.,  133,  144,  146. 

Tea,  40,  73,  197. 

Terms  in  particular  industries, 

91. 
Terms  of  sale,  meaning,  3. 
Terms  of  the  individual  house, 

52. 
Textiles,  10,  47,  68,  73,  83,  95, 

150,  178. 
Thralls,     J.,    123,     124,     125, 

127. 
Thrasher  Manufacturers'  Asso- 
ciation, 250. 
Tobacco,  44,  45,  49,  50,  54,  55, 

68,  77,  151,  199. 
Trade  acceptance, 
abuse  of,  135. 
definition,  113. 
history,  115. 
meaning,  113. 
movement,  Chapter  VII. 
present  use,  149. 
rates  on,  136. 
surveys,  140. 
system,  155. 
use  of,  55. 
Trade  Acceptance  Journal,  128. 
Trade   associations   and   terms, 
102. 


Trade     associations     and     the 

trade  acceptance,  128. 
Trade  discount,  69,  70,  71,  82, 

83. 
Trade-marked  goods,  44. 
Trading  jobber,  37,  45. 
Tregoe,  J.  H.,  123,  133. 
Treman,  R.  H.,  108,  113,  119, 

123,    124,    130,    170,    217, 

220. 


Underwear,  63,  95,  287. 
Unifonnity  of  terms,  41,  101. 
Utah-Idaho  Wholesale  Grocers' 
Association,  101. 

Veblen,  T.,  89. 

Wagner,  E.  C,  127. 

Wall  Paper  Manufacturers'  As- 
sociation, 55. 

War  Convention  of  American 
Business,  122. 

Warburg,  P.  M.,  119,  127, 
134. 

Wartime  changes  in  terais, 
94. 

Wholesaler,  7,  34,  49,  51,  96, 
103. 

Wholesalers  and  the  trade  ac- 
ceptance, 131. 

Whyte,  J.,  362. 

Willis,  H.  P.,  116,  117,  119, 
136. 

Wills,  D.  C,  119,  128,  133, 
136. 

Wilmot,  W.  W.,  128,  141,  144. 

Women's  outer  garments,  21, 
47,  53,  57,  59,  70,  71,  78, 
84,  309, 


INDEX 


375 


Wood  pulp  and  paper,  55,  61, 

62,  349. 
Woodruff,  G.,  124,  133. 
Woolens  and  worsteds,  53,  57, 

70,  83,  85,  86,  87,  97,  99, 

279. 


Woolens  and  worsteds,  men's 
wear  (jobbing),  31,  32, 
45,  46,  300. 

Working  capital  sources,  4,  5. 

Zinc,  42,  46,  54,  82,  92,  210. 


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